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Dubai June 1-3 , 2008

Dubai International Financial Center

As most of you are aware any Islamic financial initiative without

Shariah compliance is a non-starter. The Scholars do an admirable

job considering the demand on time and the pressure to deal with
more and more complex and innovative structures.
A Scholar is expected to be a banker, accountant and lawyer besides
his expert knowledge of Fiqh al Muamulat.
Shariah sources:
- Primary: the Holy Quran; the Hadith (the sayings of the Prophet
Muhammed pbuh); and the Sunnah (the practices and traditions of
the Prophet Mohammed pbuh).
- Secondary sources are Qiyas (analytical deductions and reasoning);
Ijma (consensus of Shariah Scholars); and Ijtihad (legal reasoning).
- Differences of interpretation between Shariah Scholars can create
confusion, but fortunately these differences are narrowing.

Compliance Options
In house Shariah Board or Out sourced
Contracted Scholars or Advisory Firm
The benefits of a Shariah Compliance consultancy are many fold and

have been welcomed by the institutions compliance departments,

these include

institutions deal with one entity,

they have one contract and liaise with one point of
professional service
timely delivery
coordinated response
coverage of different regional mindsets and attitudes
knowledge of the market
Eminent, experienced and respected group of

Product Range
To a large degree, most of the products in use until very recently,

were pre-Islamic and the development has been an adaptation of

existing conventional products. The market, however, now demands
that more innovative, relevant and even exotic products be made
available. This is where Shariah compliance will come into its own.
Different asset classes and terms are covered by variations of the
Ijara, such as Ijara Mawsufa Fil Dhimma; Ijara wa Iqtina (Lease to
Purchase) this term refers to a mode of financing with an
undertaking from the client to purchase the equipment or the facility,
Ijara wa istisna (funding in stages at agreed levels of completion of
the work in progress) etc.
A variety of tried and tested structures have been available in the
Islamic financial market place and the documentation has evolved in
acceptable form in many jurisdictions

Product Range
Now there are structured products, capital protected

and even attempts at hedge funds, but with the

confidence battering after the sub prime crisis and
issues regarding Sukuks there is a form of stock
taking going on.
Nevertheless, development is on going and we are

witnessing the introduction of ETFs, private equity funds, etc., which

are a conservative and equitable form of products for the
Islamic investor.

The investors look to see who comprises the Shariah Board of the

initiative being offered. Younger Scholars must be encouraged and

mentored by the principal Scholars active in the industry and we at
Yasaar are putting that into practice by seeking and adding young
and upcoming Scholars.

Taking into account the principles of supply and demand alone we

know that the number of Scholars effective in this market is a


The institutions must realize that besides a shortage of Scholars with

the requisite knowledge of finance, banking and fiqh al muamulat ,

the Scholars are their marketing tools for the success of any

Conflicts of interest
The formation of an independent Shariah compliance consultancy

helps in overcoming the prevailing perception of a conflict of

interest; namely, the ability of a Scholar to provide an impartial
opinion when employed and retained by a bank or financial
institution. In the case of Yasaar, the institution contracts with a
compliance services company that provides experienced and
renowned Scholars who cover the different market mindsets and
sensibilities. Therefore, an approved Shariah compliant structure is
provided with a view of the major markets in which the product is
likely to be launched

Future of Shariah Compliance

Regional and International Developments

There is a gathering momentum and awareness in Islamic finance

and the availability of alternatives is driving the market where more
and more Shariah compliant products are being demanded and
provided. This demand is driven by both the Muslim communities in
the West, as well as the customers in the Islamic regions themselves.
Liquidity from the oil price boom is forcing the local banks to locate
opportunities that are Shariah compliant. However, the international
banks have capabilities that the regional banks do not always possess
and these banks are not willing to give up their customers, they are
therefore making moves into setting up Islamic banking operations
of their own and making these options available to their clients.

Many financial centers are vying to become Islamic finance hubs.


Secondary Market
The secondary market is ripe for the regional banks to concentrate

and focus on and, to make concerted efforts to develop. There are

very few products and too much liquidity and so offerings are being
held rather than being traded, hence all the enormous oversubscription of most initiatives. Here, there is a twofold advantage
for the regional banks; first, to be able to maintain an involvement in
the process and secondly, earn fees from trading.

The success of Islamic finance depends on the development and

standardization of a secondary market and for its global acceptance,

but this in turn relies on grass roots spread and a critical mass. For
that we need awareness programs to educate the target markets.

Could sub prime have happened in Islamic finance, this is a question

asked over and over. The chances are slim as high debt ratios and
debt trading is not permitted.

Retail Banking
The retail sector is the future as a broad based clientele is essential

and this exists in the Islamic regions. Here also, the distribution
capabilities of the regional banks outstrip the reach of large western
banks. This is a perfect match for the two arms of Islamic banking to
be working together and, in time, there will be a balance reached
with the development of expertise and credibility of the local
regional institutions. The regional banks are smaller compared with
the Western giants but provide a much needed capability and here the
perception held of the Western banks will, in due course, be


The clientele is growing as more institutions start to offer more

products. Also the Muslim communities in Europe are demanding

these products and this demand is driving the institutions to respond.
France and Germany both have large and growing Muslim


Regulatory Authorities requirements

The demands and constraints of the regulatory authorities have to be
taken into account in all the different jurisdictions. Here the Shariah
Scholars have to work closely with the law firms to define the
products acceptability in the legal context of the jurisdictions in
which the product is to be marketed, as well as the Shariah
compliance aspect.

Recently it was highlighted that some jurisdictions are placing

hurdles in the field of Shariah compliance by demanding that

Scholars should not advise more than one client in any given
jurisdiction, with conflict of interest being cited. Can you imagine if
these rules applied to Banks, lawyers and accountants. As it is there
is a shortage of Scholars with the all the requisite expertise necessary
to operate in the field of Islamic banking and finance.

Proposed Initiatives
If any one is planning on launching an Islamic finance initiative of

any kind then they should ensure that they acquire good advice and
by that I mean what I feel are the essentials for a successful and
competitive product. Lawyers, Bankers and predominantly Shariah
Scholars, all of whom must be competently familiar with Islamic

The drafting of the documentation based on the Shariah Scholars

approved structure is very important and it must be recognized in the

jurisdiction in which it is to be marketed, subject to the relevant and
applicable laws. This is where the lawyers and Shariah Scholars have
to work closely so that the local laws are integral to the structure as
well as being compliant with the strictures of Shariah.


Next Steps
The appointment of a Shariah Board as early as possible in the

initiative is highly recommended.

It cannot be impressed strongly enough how much a recognized and

experienced Shariah Board comprising of at least three Scholars as

per AAOIFI and other regulators requirements is essential to the
success of the products acceptance.

The customers are going to look for Shariah Scholars of repute and

standing in the market place who have established their expertise

from many years of learning and acquisition of knowledge of Fiqh al
Maumulat , Shariah law relating to financial transactions. Once the
product has been developed with the Shariah Scholars, the Fatwa (or
legal opinion) is then signed.

Next Steps cont.

The documentation and marketing materials must also be reviewed to

ensure that they are Shariah compliant. Then only can the product be
launched. The Scholars need to monitor the on-going Shariah
compliance of the product by random review of the application of the
terms agreed with the financial institution.

Matters such as early repayment, default, repossession etc, are all

incorporated within the documentation but a random review would be

required for an annual Shariah audit sign off stating that Shariah
compliance has been maintained with the product over the preceding

Distribution capabilities are essential to the success of any product.

These need to be backed up by through understanding of the target

market. The target market here is predominantly Muslim customers, but
also ethical ones. In Malaysia the take up of Islamic financial products
is more or less even between Muslims and non- Muslims.

In conclusion, I would like to again state that you must ensure that

you get a good Shariah Board with the experience and knowledge of
Financial products along with Lawyers and Bankers who are familiar
with Islamic Finance. The market is growing rapidly and needs a
commitment from financial institutional entrants with relevant


Majid Dawood
Yasaar Limited
DIFC Gate Building
P.O. Box 121208
Level 12
Dubai, U.A.E.