Issue Twenty Three

How Shariah boards add value

The role of Shariah advisers is key to the development and enhancement of Islamic banking and finance. Its importance is undeniable in ensuring the compliance of products and instruments to the Shariah precepts. The development of all Islamic financial products is grounded in endorsement from Shariah advisers, without whom the compliance of the product to the Shariah would be questionable. This critical role is indiscriminate to all financial products, be it banking, takaful, captial markets, wealth management and so forth. In practice, the formation of a Shariah board may diverge from one Islamic financial institution to another on the basis of its legal status, duties and responsibilities, authority for appointing and composition of its members, the modus operandi of the decision-making process and so on. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has several standards for establishing and operating a Shariah board, such as the appointment of a Shariah supervisory council, its establishment and its report, Shariah supervision and internal Shariah supervision. Nonetheless, the most important and common objective of an existing Shariah board in Islamic banking and finance is to ensure the bank—in its product procedure and balance sheet management—complies with Shariah law. The question that arises is: who are the Shariah advisers? According to the AAOIFI standard, Shariah advisers can be defined primarily as “specialised jurists, particularly in fiqh muamalah and Islamic finance, entrusted with the duty of directing, reviewing and supervising the activities related to Islamic finance to ensure they are in compliance with Shariah rules and principles. The views of the Shariah adviser shall be binding in the specific area of supervision.”

Strong foundations for our clients' future

Islamic wealth management originates from the basic Islamic concept of wealth and extends to the structures of Islamic financial products, portfolio management, asset allocation and overall financial planning. In Islam, mankind is a trustee of the creator and all belongs to him, as made clear in the Quran, Sura Al Nur: 24:64: “Be quite sure that to Allah doth belong whatever is in the heavens and on earth. Well doth He know what ye are intent upon: and one day they will be brought back to Him, and He will tell them the truth of what they did. For Allah doth know all things.” Social responsibility and accountability are specifically rooted in this concept. Wealth management, therefore, has three phases: proper acquisition of wealth, preservation of wealth and disposal of wealth. “A Muslim should prepare himself for the next world as if he is going to die tomorrow, but at the same time work hard to improve all his worldly comforts as if he is going to live forever.” Narrated by Al-Dailami The way of earning wealth morally from acceptable sources is of utmost importance, and being wealthy is seen as positive— especially when wealth disposal considers modesty, obligatory and voluntary charitable acts. “The upper hand is better than the lower. Start with those depending on you, give charity after your needs, and whoever is modest in spending, Allah will not make him depending. Whoever lives modest, Allah makes him rich.” Hadith collection of Imam Buchari The savings achieved through such earnings shall be invested in consideration of ethical and moral issues, and a portion of it is prescribed for certain categories of needy persons (zakat).

Dispelling Schumpeterian's 'Great-Gap'

The theory of historical “Great-Gap” is popularised by Joseph Alois Schumpeter (1883–1950) in his magnum opus History of Economic Analysis. The book, edited after his death by his wife and published in 1954, attempts to cover a period of more than 2000 years, starting from the so-called beginning of history to about 20 years after the publication of Adam Smith’s book Wealth of Nations. In this intricate effort, Schumpeter admits: “This task is much facilitated by the further fact that, so far as the purposes of history are concerned, many centuries within that span are blanks.” Under a specific subtitle of Great Gap, he then spells out what he means by blank history by saying: “So far as our subject is concerned, we may safely leap over 500 years to the epoch of St Thomas Aquinas (1225–1274) whose Summa Theologica is in the history of thought what the western spire of the Cathedral of Chartres is in the history of architecture.” The implication of this Great-Gap theory is that, for more than five centuries before the writing of the Scholastics, nothing of any significance to economics was written or said anywhere. However, this Schumpeterian gap coincided with the period when Islamic intellectual history and its civilisation were in the golden age. The period of 8th–13th CE/2nd–7th centuries AH was dominated by the Abbasid empire in the east and the Andalusian empire in the west of the Islamic world. Is it thinkable that this civilisation had no economic ideas at all? Is it reasonable to assume this period was devoid of economic discussion?

Ethical fusion

Ethical finance originated when demands for enhanced financial transparency—along with the conviction that finance could be used to achieve social change—began to take root. These early efforts to address social ethical environmental issues in finance primarily took the form of negatively screened socially responsible investment (SRI) funds. For much of the 1980s and 1990s, ethical investment in the UK involved, primarily, SRI activities. SRI continues to dominate media and public attention in the UK as the most well-known form of ethical investment. Ethical finance can be understood as a response by consumers to the negative outputs of a global economy that can have devastating effects on local communities, the climate, and ecosystems. Innovations in ethical finance may reflect a concern about the limitations of capitalism to provide solutions to issues of social justice, such as the widening gap between rich and poor. Awareness of the cost of climate change, environmental damage, and child labour violations—to name a few—have galvanised support for not-for-profit organisations and provoked consumers to re-examine the activities their finances support. Transformation in economic circumstances means a shift in the landscape for sustainable investment. Questions about corporate governance, previously seen as the preserve of the specialist, have moved centre stage as questions are asked about how the market’s best and brightest bankers could preside over risk-taking that ultimately resulted in the biggest episode of wealth destruction since the Great Depression. Yet, at the same time, there are risks that companies fighting for survival will see sustainability management as an unaffordable luxury. Various stakeholders in ethical finance present a compelling case that good management of environmental, social and governance risks will make them more resilient to the ups and downs of the global economy.

Risky business

The financial crisis has created an atmosphere of euphoria in Islamic financial circles and new players have arrived on the scene to capture the moment. France, for example, has emerged as the new kid on the block to challenge London, the self-proclaimed global centre of Islamic finance. With international markets under stress, France plans to raise €155bn in long-term securities and hopes to find Islamic takers (Bloomberg, 2009). With the rebounding of oil prices and the expected new wave of wealth accumulation by GCC countries, there is reason for France to be optimistic about the future of Islamic finance. But has the financial crisis affected the Islamic investment banking industry? This article contends that Islamic banking—particularly in the GCC—has been integrated into the conventional banking system as a surrogate and has been affected by the same exuberance and losses suffered by conventional banks. This article will address the conditions for sustainability of the Islamic financial system and examine whether this system has evolved as an independent and parallel system of finance, or simply as a sub-system to conventional finance. Looking to the future, the question for Islamic banks is whether they will be used as an instrument to shore up sagging western economies and support the conventional banking system, or to chart a new path as an instrument of social and economic development.

Power behind SWFs

A sovereign wealth fund (SWF) is an investment fund held by the state of a country for investing in various asset classes such as shares, real estate and alternative funds globally and most often in foreign currencies. Their main objective is to manage the excess of liquidities coming mainly from current positive balances to enable existing and future residents to benefit from the country’s wealth. The rationale of their essence is to ensure a fair distribution of wealth among the generations and to diversify the investments’ spectrum to optimise the pension return/risk profile. Are the SWFs of Islamic countries—which have built their reputation from oil income, mainly in the Gulf region—different from other SWFs, which are supposed to manage the national wealth as “family assets” with long-term goals? Managing natural resources is not the privilege of the Gulf Cooperation Countries (GCC). Countries such as Norway, Russia and Venezuela need to manage huge amount of liquidities coming from their respective oil reserves. The Arab countries do, however, possess a strong lobbying power on global energy policies because of their strong presence within OPEC (Organisation of Petroleum Exporting Countries), which regulates and dictates the oil barrel quoted prices. The Arab countries understood these global political challenges early on. The three most significant SWFs are ADIA, with its new brothers ADIC and Mubadala of Abu Dhabi; KIA, belonging to Kuwait—the oldest SWF, created in 1953—and QIA of Qatar, launched in 2003. The studies performed by the Council for Foreign Affairs, which published a working paper in January 2009 called GCC Sovereign Funds, brought a certain transparency, a great step for providing information about this not-so-known area. Analyses can now better be made from facts and figures (or estimates in some cases) of how the Arab SWFs have developed a wealth management policy derived from benefits provided by oil resources.