As part of its ongoing commitment to contribute to the growth of the Islamic finance industry, DLA Piper, the world’s largest legal services organization by number of lawyers, has co-sponsored the International Islamic Finance Forum (IIFF), held in Dubai from 13 to 17 April 2008.
The forum, held under the Patronage of H.H. Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates, Crown Prince of Dubai and United Arab Emirates Defence Minister, was attended by international and regional industry experts of top institutions in the industry. It succeeded in delivering a challenging debate of ethical, theoretical and practical Islamic finance issues through the interaction of the professional speakers and the delegates.
Islamic Finance: the Essence
In an attempt to highlight the ethical and spiritual aspect of Islamic finance, the forum was preceded by a « Guru Day » led by Nobel Peace Prize winner Professor Mohammad Yunus, founder of Grameen Bank, Bangladesh.
Professor Yunus inspired the delegates with his unique and admirable approach to providing finance to the poor of Bangladesh by making small, unsecured loans (micro finance) with no time constraints. This initiated a debate as to whether, although not Shari’ah compliant in its form, Yunus’ micro financing model, captured the essence of Islamic finance. On this issue, Oliver Agha, Global Head of Islamic Finance at DLA Piper and Chairman of the Conference commented that this model appears to be substantively Islamic from a purely ethical and spiritual perspective. Agha further commented that micro finance based transactions could of course be structured in a genuinely Shari’ah compliant manner using e.g., a Murabaha structure.
Another highlight was Yunus’s introduction of the social business model, adopted by companies and organizations to fulfill their corporate social responsibility objectives. According to Yunus, social business can be summarized in three characteristics: preservation of contributed capital, no distribution of dividends and a social objective. Successful social business models were presented and the audience members were encouraged to implement similar initiatives.
Islamic Finance: the Theory
Throughout the forum, key issues in Islamic finance theory were the subject of sophisticated and pertinent debate. The issues ranged from the purpose of Islamic finance, to the latest controversy on Sukuk, to the unification of the Shari’ah standards and the role of the Shari’ah scholars.
Drawing on Professor Yunus’s theories, it was energetically suggested by Rachid Seetharaman, Chief Executive Officer of Doha Bank, Qatar, that economic problems should be addressed by diverting the dynamic of the current financial system from a profit driven structure to a system seeking sustainability and equitable development.
On this note, in his special address to the forum, Dr Mohammad Nedal Alchaar, Secretary General of the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), warned that Islamic finance products must be sustainable and wholly Islamic in substance if they are to withstand any future testing of their integrity and resist challenge. Defective Islamic finance structures should be adjusted to equate to the principles of Shari’ah as recently seen with the Sukuk issuance.
The Sukuk controversy was the subject of an animated debate by the speakers of the first session. These included representatives from Saudi Hollandi Bank, Badr Al-Islami and Calyon. The session focused on the latest AAOIFI publication which attempted to end the confusion and misunderstanding amongst Islamic finance practitioners on this subject. The guidelines reflect a consensus of the prominent Shari’ah scholars on the rules which should govern Sukuk issuance in the Islamic finance industry. The speakers said that, going forward, Sukuk should be asset backed and reflect a true ownership by the Sukuk holders in the underlying assets. Current practices, such as lending in the case of shortfall by the manager or providing a repurchase guarantee at face value, are strictly prohibited.
Takaful or Islamic insurance, another « sizzling » topic, was addressed by Dr Omar Fisher from t’azur bsc of Bahrain and Peter Hodgins, Senior Legal Consultant in DLA Piper. Hodgins insisted that Takaful, unlike conventional insurance, cannot involve risk transfer and shall be conceived as a communal risk sharing system. Hodgins emphasized that, as Takaful only constituted 0.7% of the total insurance market, there was a great deal of room for expansion of this product. During the conference, the unilateral donation (Taburru) structure was questioned from an Islamic jurisprudence perspective and bi-lateral/mutual (Takaful contract) arrangements were promoted.
The first day of the forum was concluded with a focus on the Shari’ah standards and the efforts towards a cross-border congruence of the scholars views. The opinions diverged from calls for a strict interpretation of the sources of Shari’ah (Al Quran and Hadith) to an invitation to go back to the objectives and intention behind the Shari’ah restrictions.
Islamic Finance: the Practice
A practical insight into Islamic finance was presented on day two of the forum through a series of presentations offered by Islamic finance practitioners and chaired by myself. The presentations touched on and debated highly controversial subjects such as Tawaruq, a method of commodity based financing, hedge funds and credit cards. The polemic on Tawaruq, hedge funds and credit cards were largely debated which reflected the current divergence in the Islamic finance market on these particular subjects.
Islamic Finance: the Controversy
The forum was brought to a close by a panel, representing financial institutions, Shari’ah scholars and legal financial experts, debating the future of Islamic finance in the Middle East.
A polemic was launched on the way forward in the Islamic finance industry. Speakers discussed the choice between continuing to create additional new structures or the reconstruction, or perhaps deconstruction, of existing Islamic finance models, all with the aim of maintaining the industry’s integrity and reputation. On this note, it was concluded that in respect of innovation, no matter how creative, you can never reach a point where something which is Haram will become Halal. However, it was incumbent to devise creative constructs within the bounds of Shari’ah as there is no legitimate human need that the Shari’ah would not meet.
by Oliver Agha * www.arabianbusiness.com 17 April 2008
* Oliver Agha is the Global Head of Islamic Finance at law firm DLA Piper Middle East.