SUKUKS
Rocked to the foundations
When an industry expands at a rapid pace, glitches can be expected. This was recently experienced in the
sukuk market that is fast emerging as the most significant form of financing around the world. Debt papers that adhere to Shariah law have been growing at a frantic pace of 40% per annum and the value of global sukuk issuances this year is anticipated to double the amount of 2007 and exceed US$80 billion. At this rate, the global sukuk market is on track to surpass the US$100bn mark in a few years.
But this industry is not without its problems. One of the biggest obstructions in its development to date is over its legitimacy with Shariah principles. This concern gained notoriety at the end of last year when Sheikh Muhammad Taqi Usmani, chairman of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), issued a statement to the media in which he said that 85% of all Gulf Islamic bonds do not fully comply with Islamic laws.
AAOIFI accounting standards are binding across six Arab countries as well as the Dubai International Financial Centre. Regulators in other countries including Malaysia, Australia and South Africa also use these standards as a base for sukuk issued in their respective countries. Banks such as Goldman Sachs Group Inc and UBS AG also use guidelines issued by AAOIFI to develop their products. With such an extensive global influence, comments made by the group’s chairman quickly led to scepticism and suspicions over the authenticity of the global sukuk market, which was already battling unfavourable credit conditions. According to Bloomberg, sales of global sukuk had dropped to US$856m this year as compared to US$4.7bn in the first quarter of 2007. This concern further fuelled speculation on the compliance of other Islamic financial products.
SHARIAH SCHOLARS
Call for more intellectual capital
As Western financial institutions—be it investment banks or insurers—rush to roll out Shariah-compliant products and services targeting Muslim consumers, there is a struggle to secure financially erudite Islamic scholars. With an estimated 50 to 60 scholars qualified to advise banks on Islamic law worldwide, the demand for Shariah scholars in the Middle East, Asia and the Western front far outweigh the current supply. Kuala Lumpur-based Islamic Financial Services Board was reported to have estimated that assets managed under Islamic rules will almost treble by 2015 to US$2.8 trillion. One can only imagine how this small pool of scholars will be able to distribute the weight of approving these assets in time to come.
A Shariah supervisory board is needed because the blessing of a Shariah scholar is pivotal for any bank or insurer before it can even consider releasing the product into the market. “Unless a financial product or service can be certified as Shariah-compliant by a competent Shariah supervisory board, that product’s authenticity is dubious,” says Sheikh Yusuf Talal DeLorenzo, chief Shariah officer at Shariah Capital Inc, a Shariah consultancy. He says this is why the Accounting and Auditing Organisation of Islamic Financial Institutions, which governs ethics and Shariah standards for Islamic financial institutions, insists that such decisions be made by a Shariah supervisory board (of not less than three members). The board is expected to have specialist knowledge of Islamic laws for transacting fiqh al mu’amalat as well as knowledge in modern business, finance and economics. Collective decision-making by the Shariah supervisory board ensures that decisions are not unilateral and that difficult finance issues receive adequate consideration by a number of qualified people.
Many financial institutions look to have their own Shariah supervisory board who can issue fatwas for new financial products such as sukuks, loans or mutual funds. Banks such as HSBC Amanah and Standard Chartered Saadiq have their own independent Shariah committee, while others hire on an ad hoc basis.
RECRUITMENT
Surge in hiring is widely forecast
The boom in Islamic banking products and services has led to a huge demand for Islamic banking experts worldwide within all areas of banking—retail, commercial and corporate, and at all levels. Organisations across multiple regions are actively seeking CEOs, risk analysts, accountants, product specialists and a whole host of other positions. While Islamic banking continues to grow, there will need to be a corresponding increase in hiring by organisations.
The initial boom in the early 90s of Islamic banking in Malaysia created a new breed of bankers with both conventional and Islamic expertise. Malaysia was the traditional breeding ground for Islamic bankers. Soon after the Middle East started to expand Islamic banking, many individuals in Malaysia were made extremely attractive offers to move to the Middle East and help set up Islamic windows and subsidiaries. Saudi Arabia was aggressive in trying to import talent into the region by offering inflated compensation. After some initial success of attracting people, the country also started to lose good individuals as other countries in the Middle East, such as the UAE, started increasing their Islamic banking presence. The increased freedom in lifestyle and culture was a key motivator in people moving from Saudi to other areas. Saudi is now in such a position that it has to pay significantly higher salaries to attract the top talent. This has forced other countries, such as Malaysia, to try to employ initiatives to retain their top talent after losing significant numbers of employees’ between 2001–2006. Many established Islamic banks have extremely high turn-over as a result of employees leaving once they have been trained in Islamic finance and banking.
Some organisations are concerned that the quality and vision of their Islamic offering may be tarnished if they focus purely on hiring conventional bankers. There are several prominent figures in Islamic banking, based in both the Middle East and Malaysia, who are non-Muslims and are British/American nationals—further proof that conventional banking concepts can be transferred into an Islamic offering. Some traditional organisations are concerned about the impact of hiring a non-Muslim to lead their Islamic offering.
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