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The need for Shariah standardisation in Sukuk issuance

04 August 2010
Dr. Ahmad Rufai Muhammad, head of Shariah, and Ijlal Ahmed Alvi, CEO, International Islamic Financial Market
As Islamic finance has grown, differences in rulings on whether or not products are Shariah compliant have surfaced. Although Shariah interpretations and applications are similar, this does not always translate into unified documentation and unified application. Conformity amongst the Shariah supervisory boards of Islamic financial institutions is needed. We believe that standardisation of certain structures and contracts is necessary in order to avoid inconsistencies between different Fatwa rulings and their application by Islamic financial institutions regionally and globally.
The existence of a unified Shariah board through a council representing different Islamic schools of thought worldwide is necessary as this would facilitate the conformity of certain existing wider market product structures such as Sukuk. Sukuk are a vital mechanism for raising money in the financial markets. Hence, continuous improvement of the functions of Shariah boards to achieve a global standard for Sukuk is essential because lack of standardisation in the Sukuk area is a contributory factor to low issuance levels. Moreover, the present financial crisis has raised a number of structural issues in Sukuk such as transfer of ownership and the Sukuk holder's ability to have direct control over the assets in case of default.
The present market conditions have clearly identified the urgent need to revisit the issue of asset based versus asset backed Ijarah Sukuk. The issue has legal and documentation implications but must be studied by Shariah scholars in order to safeguard the rights that holders have perceived at the time of issuance of the Sukuk as well as issues such concerning fair risk and reward in the case of Musharaka and Mudaraba Sukuk (refer Sheikh Taqi Usmani's ruling), needs to be looked at from a convergence point of view. These issues have global significance and universal convergence is absolutely essential.
In our view the establishment of a Shariah Board at a global level will be helpful and can play a major role in convergence as well as in facilitating the development of a robust and unified Islamic financial services Industry. This can be achieved if Shariah scholars from around the globe contribute towards a greater understanding at national and international level of convergence. Such convergence and harmonisation can only happen with greater engagement among regulators, practitioners, Shariah scholars and other stakeholders in the Islamic finance industry.
We believe that collective efforts through cooperation and collaboration between major Islamic financial standard-setting and development bodies such as the International Islamic Financial Market, the Accounting and Auditing Organization for Islamic Financial Institutions, Islamic Financial Services Board and central banks is important in strengthening the fabric of Islamic finance.
Note: The views are purely of the authors and do not necessarily reflect the views of IIFM or its members.
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© Zawya Select 2010

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