Towards Standardization of Islamic Banking Products

Nairobi - March 29, 2011

الرحيم الرحمن الله بسم

Muddassir SiddiquiPartnerSNR Denton, Dubai

Benefits

• Predictability• Cost reduction• Consistency, harmony• Risk mitigation• Single bench mark for performance• Dealing with multiple Shari’ah Boards– Syndicated financing - Restructuring

Challenges

• Standardization is the by-product• Standardization requires– Shari’ah standards and views

• AAOIFI, Fiqh Academies

– Multi legal jurisdiction– Accounting treatment– Enforcement

• Self regulated V. Regulatory authority

– Transparency

Consensus of Shari’ah Views• رحم من إال مختلفين يزالون وال واحدة أمة الناس لجعل ربك شاء ولو

هود- ربك:

• Many schools of Islamic laws – biggest challenge• History– Muwatta, Fatawa Alamgiri, Usmani Majallah, OIC

International Islamic Fiqh Academy, Al-Azhar University, AAOIFI, IIFM etc.

– Shari’ah position not consistent – example tawarruq– Disagreements within a single SSB • Example - tawarruq

Consensus of Shari’ah Views, cont.

• Use of fictitious contracts• Islamic finance is still at and embryonic stage– Work in progress – AAOIFI Standards are new – first edition• Need revisions in the light of practice and experience• Sukuk example

– Premature to standardize while the Standards are new– Needs review in light of lessons learned

Multi Legal Jurisdictions

• Most central banks regulate the industry but refrain from regulating the products

• Few Central Banks with central Shari’ah control• Malaysia, Pakistan, Sudan– standardization v. innovation – both are needed –

balanced approach• Individual SSB operate independently• IFI desire confidentiality

Accounting

• Inconsistent treatment between AAOIFI and International accounting standards – Leases – Substance over form

Enforcement

• Shari’ah risks – TID v. Blom• Various courts have various approach– contract invalid – Board of Grievances– Re-characterize the contract - Dubai– Some terms invalid – early payment discount– Use of fictitious contracts makes enforcement

unpredictable– Commercial reality v. form

Suggestions

• Central Shari’ah Board• Qualified members of Shari’ah Board– Multiple discipline – law – finance - accounting

• Transparency– Fatwa should mention the basis

• Separate entity for external audit• Products based on:– Objectives of the Shari’ah, rationality, reality of the

relationship between the parties

• Thank you• شكرا

• بركاته و الله رحمة و عليكم السالم و