Regulators target $1,000 scholar fees: Islamic finance

Bank Negara Malaysia (BNM) headquarters in Kuala Lumpur. (Creative Commons)

KUALA LUMPUR: Islamic finance regulators are working to reduce the role of scholars, blaming delays and excessive fees for stifling growth in the industry.

Bankers and officials from Bahrain to Indonesia are standardizing documents and bond structures to limit impediments caused by varying interpretations of Shariah law. It can take up to 12 weeks to arrange a sukuk sale, compared with eight for a non-Islamic debt offering, according to law firm Clifford Chance LLP. A well-respected expert can charge between $500 and $1,000 an hour in the Middle East, according to two scholars, who declined to be identified due to the sensitivity of the issue.

Islamic finance institutions require rulings from scholars, known as fatwa, before they can market any securities or funds in an industry whose assets are set to double to $3.4 trillion by 2018, according to Ernst & Young LLP. Their reputations can heavily influence the success of a product, according to Bank Negara Malaysia’s Shariah Advisory Council, driving demand for a select group of experts and leading to inflated earnings.

“These old gangs are still sitting there in the top firms, issuing fatwa without understanding the consequences,” said Ishaq Bhatti, an associate professor who teaches Islamic finance at La Trobe University in Melbourne. “The dollar value they earn they don’t contribute to the product’s development.”

Scholars pass religious decrees on whether a financial product conforms with Islamic tenets such as a ban on interest payments. While Malaysia and Indonesia have centralized Shariah boards to approve structures, it doesn’t stop bond issuers from seeking outside endorsement.

Sheikh Bilal Khan, the co-chairman of Dome Advisory Ltd. in London that specializes in areas such as Islamic finance and private equity, said the fees demanded by scholars depend on the complexity and nature of the transaction, declining to be specific on amounts earned.

“The industry is already standardized,” Khan said in a phone interview Monday. “Bringing standardization has a disadvantage. The transaction is more rigid in the market. If you want to innovate a market, you want flexibility.”

Shariah finance is looking to shed its image as an opaque and fragmented business as it enters new markets. The U.K. sold its first sovereign sukuk in June and Hong Kong plans to follow suit later this year. The governments of Luxembourg, Kenya and the Philippines are also planning debut issues.

The International Islamic Financial Market, a standards-setting body in Bahrain, is developing common templates for structuring sukuk to reduce delays caused by differing views between scholars, Chief Executive Officer Ijlal Ahmad Alvi said in May 6 interview in Jakarta.

“Due to the lack of standardization, there is indeed too much reliance on scholars,” Murat Unal, chief executive officer of Funds@Work AG, a consulting firm near Frankfurt that produced a 2011 report on Shariah scholars, said in an Aug. 6 email interview. “The more international standard-setters agree on standardization, the less there will be a need for scholars.”

The central bank of Malaysia, the world’s largest sukuk market, has forbidden scholars from sitting on more than one Shariah advisory board for each type of institution since 2010. Most countries don’t impose such limits.

Islamic bond offerings worldwide increased more than fourfold over the last decade to $26.9 billion so far this year, compared with $43 billion in 2013 and a record $46.5 billion in 2012, data compiled by Bloomberg show. As the $1.7 trillion Shariah finance industry gained greater global prominence, the pay of scholars has increased accordingly.

The number of hours an Islamic expert has to spend on a sukuk issue depends on the complexity of the structure and a standard transaction would involve about 20 hours of work, said one of the scholars who declined to be identified.

“Particularly if the transaction is in big volume, they want a well-known scholar to endorse it so they don’t mind paying,” Mohammad Akram Laldin, deputy chairman of Bank Negara’s Shariah Advisory Council, said in an Aug. 7 interview in Kuala Lumpur. “They know that people are not going to question the credibility of this scholar. This scholar signs off, people know that he knows his stuff.”

A version of this article appeared in the print edition of The Daily Star on August 13, 2014, on page 5.




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