Moving Away from Tawarruq?

Twenty-six Islamic banks signed off on a standardised Wakalah deposit agreement, which some bankers said could help the industry reduce its reliance on the controversial Commodity Murabahah structure, Reuters reports. “Besides cost and resource savings, the adoption of the standardised Wakalah placement agreement would promote transparency, consistency, operational efficiencies and robustness in Islamic deposit placement transactions,” said the Association of Islamic Banking Institutions Malaysia, which launched the template agreement. “In six months’ time, all the banks will be using the Wakalah,” said one Malaysian Islamic banker. “It has fewer issues than the Commodity Murabahah.”

Wakalah is an agency structure where a depositor or investor authorises an agent (the bank) to invest his funds in Shariah compliant assets or businesses.

Finding alternatives to replace controversial instruments is a step in the right direction and it augurs well for the industry.

The “will” to regulate

Islamic finance could also face a systemic failure and reputation risk unless there is a unified and dynamic regulatory framework applied not only domestically but also globally, warned an economist and former International Monetary Fund (IMF) executive director Dr Abbas Mirakhor.
He added that the industry may have more regulatory standards but there is no implementation of the standards in a unified manner and there is no organisation that supervises the instruments. Therefore, Mirakhor said that to ensure a decent chance of growth and development, one has to make sure the regulations are unified and accepted by all jurisdictions.
“We need to create a uniformed standardisation for Shariah products and at the same time you need a uniformed, comprehensive and universal regulatory system in place, which can have the authority of early warning when it comes to weak instruments," he said.
However, the question is whether it should be done via an association of Islamic banks or central banks that have Islamic Finance operating in its jurisdiction. Such arrangements are not difficult but it depends very much on the "will" of the participants, said Mirakhor. (Bernama)

In my previous posting, I made a feeble attempt at article review in which one of the points raised was the difficulty in finding a unified opinion due to the differing mazhabs followed by the different scholars. It was also raised that perhaps a product should be approved with a “warning” label as to which mazhab the approval was arrived at.

Speaking about “will”, a lot of jurisdictions leave the Shariah compliance and monitoring role to the individual banks, the question is, are the banks willing to let go of this “power” to approve products?

Given this major obstacle in reaching a unified stand, how then do we proceed with a global, central authority to supervise and regulate the industry? I feel the IFSB, AAOIFI, Fiqh Academy are global institutions which can (and should) play the regulators role, if allowed.

I agree with Mirakhor when he said a regulatory authority “needs to have enough mandate to supervise/regulate the policy”. Getting the mandate however, might not be so easy.

Controller of Compliance

Dr Mohamad Nedal Alchaar, secretary-general of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) declared at the IFN 2009 Issuers & Investors Asia Forum that his organization will determine the Shariah compliance of a product, and that this could be done from the latter half of next year.

This model of a central body deciding/monitoring/controlling Shariah compliance of financial products is not new; Bank Negara Malaysia and the Securities Commission is already playing that role (for the Malaysian market) as no product is allowed to be sold without their seal of Shariah compliance.

With a central compliance regulator, what will happen to the individual FI’s Shariah Advisory Committee (SAC)? What is their role? Are their decisions/recommendations binding? A central Shariah compliance authority could relegate their role to a mere secretariat, vetting Shariah issues before being approved (or rejected) by the central body.

A central, globally accepted Shariah controller of compliance being the standard setter and standard bearer could help in solving the standardisation issue. But, isn’t the OIC Fiqh Academy already doing that?

Any central body wishing to determine the Shariah compliance of a product would not be successful if standardisation of the Shariah interpretation is not in place. We should work towards that first.

Standardisation of Shariah Rulings

Bank Negara Malaysia introduced the “Shariah Parameters” with the objective of providing a comprehensive understanding of the principles and basis of adopting Shariah contracts for Islamic finance products in order to standardise the Islamic finance practices. The parameters are designed to clarify concepts, principles and conditions of Shariah contracts and provide the basis for decisions on matters relating to conditions, mechanisms and implementation of Shariah contracts.

Standardisation does not mean restrictions. It simply means things are done in a more consistent manner, avoiding confusion and disputes. I would think reaching a consensus on Shariah rulings would not be such a big problem as many scholars are already sitting on committees in different “Shariah jurisdictions”,* which often come up with different fatwas/rulings.

Standardisation will also enable a better understanding of Shariah based finance among the newcomers to the industry. It will eliminate confusion and make it easier to grasp the principles that govern the industry. Documentation and structures will be more comprehendible and legal disputes can be settled in a more orderly and consistent manner.

Will standardisation create a straightjacket and stifle creativity? I doubt so. In fact it will enable creativity to be undertaken more systematically in the presence of consistent guidelines and parameters.

With this standardisation, a Shariah decision made in Bahrain, Abu Dhabi, Kuala Lumpur or even London will be understood, accepted and applicable globally. This will enhance the efficiency and effectiveness of the industry and hopefully will open up more avenues for innovation and growth.

Standardisation will eliminate the Malaysian standard, GCC standard etc. It will create just one global standard and that bodes well for the industry.

*By Shariah jurisdictions I mean Malaysia, GCC and Europe/North America where the fatwas tend to be different depending on the Mazhab and the scholars’ individual interpretation.