Shariah Governance Islamic Finance.pdf

PractitionerÒs Article

137ISRA International Journal of Islamic Finance • Vol. 5 • Issue 1 • 2013

* Sayd Farook is Global Head of Islamic Capital Markets, Thomson Reuters, Kingdom of Bahrain. He can be contacted at [email protected].

** Mohammad Omar Farooq is Head of Center for Islamic Finance, Bahrain Institute of Banking and Finance, Kingdom of Bahrain. He can be contacted at [email protected].

SHARÔÑAH GOVERNANCE,EXPERTISE AND PROFESSION:

EDUCATIONAL CHALLENGES IN ISLAMIC FINANCE

Sayd Farook* and Mohammad Omar Farooq**

Abstract

The shortage of qualified SharÊÑah practitioners (scholars) is a major challenge facing the Islamic finance industry, which relies on the high concentration of a few top scholars/practitioners for SharÊÑah compliance assurance. A good number of the top practitioners have risen to prominence in the absence of any recognized standard or requirement for this profession. Their qualification and training which equip them with the necessary skills to be effective in dealing with the complexities and linkages in a modern economy and financial system is an important area of concern. These challenges can be addressed in the long-run by taking a number of steps: (a) establishing educational and training institutions with relevant programmes; (b) designing curriculum and setting standards for qualifying SharÊÑah practitioners as a professional pool to serve the industry; and (c) forming a professional body to recognise and certify SharÊÑah practitioners just as is done in any modern professional discipline. This conceptual paper examines the pertinent issues and delineates a brief outline of a qualification framework to initiate the relevant discourse.

Keywords: Islamic finance; SharÊÑah governance; SharÊÑah supervision; SharÊÑah scholars; Doctoral system.

SharÊÑah Governance, Expertise and Profession: Educational Challenges in Islamic Finance

138 ISRA International Journal of Islamic Finance • Vol. 5 • Issue 1 • 2013

I. INTRODUCTION

A frequently discussed issue in the Islamic finance industry is the shortage of SharÊÑah scholars and the need for a global infrastructure to fill this gap within the framework of some recognized standards (Greuning and Iqbal, 2008; Hamzah, 2010). Despite pronounced resistance from some senior scholars, the recent initiative by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to set a new standard for SharÊÑah scholars underscores the concern (The Peninsula, 2010; El Baltaji, 2010; El Baltaji and Anwar, 2010; New Horizon, 2011).

This is indeed a formidable challenge, but experience with the industry gives us new insight on how the required human resources and talents can be developed within the presently available infrastructure.

Currently, the global financial system is gradually embracing Islamic finance as one of its definitive segments. While there are many institutions, including international organisations, such as Thomson Reuters, Deloitte Touche, Moody’s and Bloomberg, that are recognising the importance of this segment and mobilising more resources to support Islamic finance initiatives, the ‘privilege’ of Islamic finance extends only to the communities that can afford its high SharÊÑah-compliance premium (Shufelt, 2010). It is widely recognized that there are hurdles other than affordability and cost that remain significant bottlenecks for the industry’s growth. These include lack of wider and cheaper distribution channels, standardised products and higher volumes and liquidity. In addition, the credibility of Islamic finance continues to be a problem with the common Muslims, especially due to scepticism regarding the core SharÊÑah-compliance process (El Gamal, 2005; Remo-Listana, 2009; Ahmed, 2010; Muto, 2010).

For Islamic finance to move to the mainstream and really serve the man on the street, it must resolve, among other matters, issues of efficiency and credibility associated with the SharÊÑah-compliance standards and process, which threaten to place the entire Islamic finance industry at risk. The potential downside, if the industry and its gatekeepers, the SharÊÑah scholars, do not resolve these challenges, is significant. One negative repercussion would be regulatory capture and the other would be loss of legitimacy in the eyes of its primary customers: the Muslims.

As SharÊÑah governance is at the core of Islamic finance, a related and pivotal challenge is the education and training of SharÊÑah

Sayd Farook and Mohammad Omar Farooq


scholars11 in the context of the complexity, dynamism and inter-relatedness of our contemporary world, so that the qualifications are duly standardized. This paper specifically discusses this challenge facing the Islamic finance industry and looks into possible long-term solutions to address the issue of the qualification and training of SharÊÑah scholars.

II. SOME PERTINENT DIMENSIONS OF THE CHALLENGE

Before dealing with the issues pertaining to the SharÊÑah scholars, particularly their qualifications and ideas about setting standards, the following highlights a few pertinent dimensions of the challenge facing the industry.

A. Costs

The SharÊÑah diligence process is the most important and distinctive aspect of Islamic finance and the additional costs (inefficiency taxes) borne by all the market participants constitute a significant and consistent challenge. Consider the case of a hypothetical ÎukËk. The additional cost for the issuer ranges anywhere between a quarter of a million to a million US dollars. This includes the costs for the SharÊÑah

1 It is important to clarify at the outset that the term “SharÊÑah scholars” can be a misnomer, as it relates to a niche field of specialized professional expertise, rather than the general sense of ÑÉlim (scholar and expert). As explained in Standard 10 (2009) of the Islamic Financial Services Board (IFSB): “Another term that has been commonly used within the IFSI [Islamic financial services industry] is ‘Shari’ah scholars’, which refers to persons who are engaged professionally by IIFS [Institutions offering Islamic financial services] to provide expertise in the Shari’ah compliance process. While the word ‘scholar’ has been preferred as a direct translation for ‘alim’ (plural: ulama), which connotes a person who is learned and expert, in the context of the IFSI we are actually referring to a more specialised level within Fiqh al-Muamalat (Islamic commercial laws) rather than Shari’ah more widely or other areas of Islamic studies. Furthermore, that specialisation is dedicated towards providing expert opinions in the form of Shari’ah pronouncements/resolutions related specifically to Islamic financial services and usually not directly to the general public or businesses more widely. Therefore, again in the interests of clarity, it is important to stress the ‘professional’ (as opposed to an academic’) connotation associated with this role. Hence, this document adopts the term ‘members of the Shari’ah board’, rather than ‘Shari’ah scholars’, to refer to ulama or others who provide their professional services specifically within the IFSI.”



advisory, structuring and the additional legal documentation cycles.2 Documentation alone generally can cost in six figures regardless of the size of the issuance, as described by Remo-Listana (2010):

Because of the relative infancy of the product, ÎukËk documentation is often highly negotiated and based on no existing template, making the process costlier than conventional bonds and other securities. … Documentation cost tends to be fixed at $100,000-250,000 per issuance, a negligible cost if the issue is sizeable.…Standard & Poor’s (S&P) confirms that the costs of structuring and issuing ÎukËk remain high relative to conventional bank loans and bond issuance. Legal and accounting fees contribute to this higher cost structure, as does uncertainty regarding the perceived risk associated with these instruments.

According to a report by Trowers and Hamlins (n.d.), the cost of issuing ÎukËk can be as much as 60% higher than conventional bonds. In 2009 S&P warned that the relatively high cost of structuring and issuing ÎukËk could have a negative impact on the growth of the ÎukËk market (Arnold, 2009).

Similarly, these issues extend to everything from corporate finance products to structured products. There are two obvious solutions: distribute the costs over a wider number of transactions (economies of scale) or reduce the quantum of the costs (through reduction in fees per transaction). The former can be induced via standardisation and minimizing the role of SharÊÑah scholars serving on individual boards or advising on a specific offering. Unfortunately, while there is movement in the direction of standardisation, its pace and extent still remain weak.

B. Conflict of Interest

The challenge of scholars being appointed by management and/or shareholders of Islamic banks/financial institutions/funds and thereby being paid by them represents a serious, yet presently irresolvable conflict of interest in the eyes of the modern corporate governance observers. Add to this the fact that some scholars now get paid in terms of basis points per fund managed (albeit to assist smaller fund

2 It is noted that Malaysia as a leader in the field of Islamic finance is trying to address the relatively higher costs of ÎukËk issuance (See, Aziz, 2007).



managers); a value-free compliance expert would suggest that this is a serious conflict of interest between their duty to maintain perceived and actual independence and their own need to get paid for their services.

Some countries have resolved this issue to a certain extent with the announcement of a Central SharÊÑah Committee, which has to approve all products in the jurisdiction, in addition to having institution-specific boards. This issue has led Pakistan to require an Islamic financial institution (IFI) to have only one SharÊÑah scholar, and that scholar is barred from serving any other institution. Like many others in the industry, AAOIFI’s former Secretary General Dr. Nedal Alchaar has publicly noted this concern: “There’s a potential case for conflict of interest, and a case of information leakage or perhaps competition impact” (El Baltaji and Anwar, 2010). Other methods to resolve this would be if the board was selected/allocated impartially and paid by the central SharÊÑah committee established by a centralised body such as the central bank or securities regulator. However, as with the previous central SharÊÑah committee initiative, these recommendations are fraught with quasi-government/regulator intervention, bodies which may or may not have the foresight or will to implement such bold regulations. Of course, it is important to note that emphasis on self-regulation should receive the primary emphasis, but while regulation is not always the solution, there are meritorious contexts for regulatory intervention, especially at the early stage of the evolution of an industry.

The very same issue of conflict of interest related to concentration of a few scholars is related to the lack of standards in qualifying SharÊÑah practitioners, as a number of scholars have risen to prominence without going through any substantive standards of scrutiny, while new entrants in the niche area of SharÊÑah expertise, who might have meaningful education and training, find themselves marginalized by the industry. Establishing standards of qualification can lessen the problem in this regard.

C. Multiple Board Representation

The network analysis research of Funds@work (2010) provided the best visual representation of one of the most serious challenges the industry is facing: the multiple conflicts of interest.

With the top 50 scholars being involved in the boards of more than 73 percent of IFIs (holding 834 positions), it is evident that there is serious concentration risk in the most critical function of SharÊÑah



compliance certification (Wright, 2006). This concentration also has cost implications. The cost of SharÊÑah due diligence to the industry, as discussed earlier in this paper, is in good part the income of those who provide SharÊÑah scholarship and expertise to the industry. According to some reports, top scholars earn an astronomical income on a per project basis. “Scholars can earn up to $150,000 per project and it can take four to six months for a SharÊÑah-compliant project to be developed. For the scholar, that can mean between four to six weeks of work on a project” (Reuters Summit Notebook, 2010). While there is a demand for disclosure of compensations to the SharÊÑah scholars, only some scholars agree while many others are very sensitive about it. Wright (2006) states:

Some feel that shariah costs ought to be disclosed by banks, as they are for board directors. This proposal divides opinion, even among the most apparently like-minded of scholars: when Asiamoney puts the suggestion to Dr Elgari and Shaikh Nizam Yaquby, the two most well-known scholars in the Gulf, Elgari agrees (“The only reason they are not doing it now is maybe they’re ashamed: this is the amount we are paying our scholars”) and Yaquby reacts angrily.

The anecdotal information that is available in public gives some idea that compensation to the scholars is a big chunk of the SharÊÑah-compliance process. Wright (2006) elaborates:

[T]he most prominent scholar in Dubai made waves recently when he suggested that US$300,000 was not an unusual fee for advice on a complex transaction. Others suggest that the retainer for an international bank would be in the region of US$150,000 to $250,000, and one source says he was quoted US$100,000 just to get Shariah approval on a fund, after all the product development had taken place.

Such concentration-cost relationship casts a long shadow over the efficiency of the SharÊÑah compliance process and raises question whether such high cost of SharÊÑah compliance is due to the relevant cost of service or due to the concentration. Yet, some may argue that there are economies to having SharÊÑah scholars serve on multiple boards as they can take their experience (not the institution’s intellectual property) and apply cutting-edge thinking across institutions. This



reduces the time (and therefore costs) it usually involves to move through the SharÊÑah diligence process, particularly for sophisticated products involving contemporary financial terminology and several conjoint documents. The industry professionals who work closely with the SharÊÑah boards almost consistently report that much of the preparation and review work is done by individuals at a lower level, and the members of the SharÊÑah Board more often than not do not review the documents in detail. Rather, they either focus on the summary or the presentation of those who have designed the products and/or prepared the documents. If that is the case, then the exorbitantly high premium charged by the SharÊÑah scholars can be reduced significantly by setting standards for qualification and making it a more level playing field for the younger SharÊÑah experts.It has been argued by some of these senior scholars that having SharÊÑah scholars on multiple boards also aids in the process towards uniformity and standardisation as these scholars will apply uniform principles and structures (where requested) to several institutions. However, the flipside is significantly dangerous for the industry. With SharÊÑah scholars spread over several SharÊÑah boards (some sit on as many as 80 boards), the situation is increasingly burdensome for a rapidly aging group of SharÊÑah scholars, some of whom are well beyond retirement age. The argument is further weakened by the fact that generally top SharÊÑah scholars are not involved at all in training and thus do not serve as a bridge to transfer their accumulated knowledge and experience to the successor generation.

This state of affairs, besides contributing to a rapid decline in the accumulated knowledge in the industry, could have serious cost repurcussions for the industry as it tries to cope with an even smaller group of ‘recognised’ SharÊÑah scholars, whose time will require an ever increasing premium to make up for the wider shortage of talent.

D. SharÊÑah Diligence

Further, it is highly unlikely that such thinly stretched SharÊÑah scholars are able to provide the appropriate level of SharÊÑah diligence to every piece of documentation. Rather, they will look at the structure outline and leave the thorough due diligence to their deputies. It is difficult to assume that all points of SharÊÑah compliance would be covered in depth for a ÎukËk-offering memorandum (they average around 150 pages). This becomes even more difficult when it comes to funds and structured products. Some may argue that, like lawyers



and custodians, SharÊÑah scholars also get accustomed to the standard terms and conditions and this may result in quicker processing time. Nevertheless, it does not necessarily imply that there is an appropriate standard of due diligence on each piece of relevant documentation.

The above-mentioned dimensions of the challenge should make the stakeholders of the industry think about the potential consequences of the existing concentration of top SharÊÑah scholars serving the industry and the relevance of setting meaningful standards of qualification and preparing the successor generation of scholars and experts, which will also open up opportunities for younger entrants desiring to serve the industry.

III. PROPOSALS ON SHARÔÑAH SCHOLARSHIP

During the initial phase of the industry, the issue of SharÊÑah scholarship was more challenging as there was hardly any scholar with experience or expertise in this field, as Archer et. al. (2007) explain:

In those early days, there were few scholars with knowledge of finance and banking. The handful of scholars that had published on related subjects were without practical experience, having had no exposure whatsoever to modern banks and financial markets. In many cases, banks retained scholars based solely on their reputation as authors and authorities on Islamic subjects in general; not as experts or authors of works on finance or related subjects.

Thus, most of the senior scholars in high demand also rose to the top not through any formal and systematic process of education, research and gaining of experience. Instead, they became practicing scholars/experts through participation in the industry and learning by doing. There was simply no alternative during that phase. However, it is highly desirable―and some would argue imperative―that the qualification and preparation of scholars to better serve the industry should be scrutinized so that the future generation of scholars and experts can be reared and prepared more systematically. This has become even more important, if SharÊÑah supervision should involve, as Timm (2007) states, “highly qualified and recognised scholars with vast experience and knowledge concerning modern dealings and



transactions in financial matters” as well as the macro-environment in which such financial activities take place.3

Given the knowledge of the gatekeepers of Islamic finance and the challenges of the SharÊÑah compliance process, how can the industry resolve these issues? The idea of creating a supranational SharÊÑah association would not be feasible, given the level of discomfort that unification and cooperation present in any jurisdiction related to Islamic finance. The other solution pertains to certifying newer generations of would-be-scholars to ease the supply-side barriers to growth.

In response to this supply-side challenge, AAOIFI has commendably established the Certified SharÊÑah Advisor and Auditor (CSAA) program. A challenge with this program is that it does not really qualify scholars to create new opinions; rather, it allows successful candidates to apply existing standards to their professions as SharÊÑah advisors or auditors. Furthermore, the current CSAA program merely provides training equivalent to exam preparation without ensuring any meaningful training―especially, experience-based―to the certificate recipients. In addition, many of these CSAA qualified individuals already have experience and are getting the certificate for recognition. Thus, instead of contributing toward enhancing SharÊÑah scholarship, the programme is limited to training the community of practitioners and even that at a rather average level. It is also not meant to provide training to new individuals to equip them with preparation that will enable them to take up the mantle as the successor generation of scholars and experts.

Thus, a more structured and systematic approach to the education and training of the SharÊÑah scholars is needed. In this regard, one possibility is introducing a doctorate system (or advanced graduate/postgraduate education) and requiring potential and interested scholars to go through it. With relevant adaptation in light of the legacy of Islamic scholarship and the contemporary needs, this may provide a highly suitable and effective form of educational discipline and rigour to qualify an individual to be universally recognised as a SharÊÑah scholar or a scholar in any other field. The doctorate system is not indigenous to the Islamic scholarly tradition of recognition by

3 According to El Tiby (2011: 78), among three main reasons why the “Capital market in the Islamic Financial System has developed at a slower pace compared to the overall banking system…[is] the lack of clear Shari’ah guidance in this area and the lack of Shari’ah scholars with a strong and solid financial background.”



peers. Regardless, it is the most widely established and recognised form of scholarly achievement that is presently available, and it is not surprising that many if not all the existing SharÊÑah scholars have already gone through it, though their education was not necessarily to specifically prepare them for Islamic finance.

Indeed, the concept of a higher doctorate found in some European countries (and we would argue even the doctorate itself) presents a similar parallel to the peer recognition process informally adopted to recognise SharÊÑah scholars. The higher tier of doctorate requires the submission of a portfolio of published research of a very high standard, much like how some Islamic scholars are recognised by other established scholars for their advanced application of SharÊÑah concepts to contemporary challenges. Similarly, even the doctorate system, as employed by most universities in the world now, requires the candidate to prove his level of knowledge in a certain field by undertaking peer-examined research, which is also expected to be sustained during one’s scholarly career. Further, the system most closely replicates mentored learning as the student relies on the supervisor, an established scholar, to transfer his knowledge within a structured framework.

To understand and appreciate the fact that not only is there no inherent problem with the doctoral educational system from the Islamic perspective, but also that this structure of education is of great merit, having evolved from accumulated human experience, it is important to examine the system in its essence.

Modern higher education, especially at the doctoral (PhD) level is now so pervasive that “... the effects of doctoral education ripple out across nations and generations” (Walker, 2008: 2). Why has it become the modern standard? It has become an imperative, and in the contemporary developed societies both the public and private sector allocate so many resources to it, because: “Graduate education has played an important role in developing the human capacity necessary to lead the increasingly technological and knowledge-centered economies of the last and present centuries.” (Altbach, 2006: 65). In this globally competitive world, it is not enough to just have a traditional education that is neither effectively anchored in its own Islamic legacy nor has the confidence and adherence of its own people because of its disconnect from the real world (Stanton, 1990; Meijer, 2009). Beyond just the scholars and experts needed for the field of Islamic finance, the educational system in general needs a thorough overhaul that can transform its people’s capacity to acquire, process and apply knowledge in light of the positive pursuits as indicated in



the Qur’an and the Prophetic legacy. Once we are able to cut through the parochial maze, it should not be difficult to discern, appreciate and acknowledge how modern educational methodology has earned its dominance and is just as relevant to the Muslims as to everyone else.

This requires understanding the nature of the doctoral educational system. As Walker (2008: 3) explains: “... doctoral education is, by its nature, in the business of asking hard questions, pushing frontiers, and solving problems ...” The great civilization of Islam that now has become the “golden past” was built on the same underlying spirit. Indeed, the empirical attitude and inductive methodology were instrumental in this context and “… it was precisely in Islam that originated the spirit and method of the empirical attitude and inductive inquiry, which he [the late Allamah Muhammad Iqbal] regarded as the key to conscious systematic progress” (Hodgson, 1974: 349). Gradually, Islamic civilization declined, not just in political power and authority, but the pursuit of knowledge and inquiry became fundamentally restricted to theology, jurisprudence and sufism. The historical fact remains that our scholars―experts, scientists, jurists, philosophers, theologians, historians―embraced mind-building as part of the Prophetic legacy, and as part of their respective fields, they raised and dealt with hard questions they encountered. They pushed virtually every possible frontier of their time and, often in an applied manner, many of them sought and discovered solutions to problems (Farooq, 2000). The expectation from our present and future generation of scholars, whether in the field of fiqh, finance, education or science, is no less.

The purpose and philosophy of doctoral education have been identified in many different ways. As Thomas and Brubaker (2000: 1) explain:

Traditionally in academia, the two main purposes of master’s-degree and doctoral projects are (a) to provide graduate students guided practice in conducting and presenting research and (b) to make a contribution to the world’s fund of knowledge or to improve the conduct of some activity. The practice aspect...aim[s] to equip students to do research and writing of respectable, publishable quality in the future. The contribution-to-knowledge aspect is intended to make the student’s study more than just a learning exercise by using this opportunity to produce valued information or to introduce a point of view not available before.



However, the way Golde and Walker (2006) articulated the primary purpose of doctoral education better resonates with the Islamic ethos, as it is also consistent with the legacy of Islamic scholarship throughout history:

The development of students as ‘stewards of the discipline’ should be the purpose of doctoral education. A steward is a scholar in the fullest sense of the term—someone who can imaginatively generate new knowledge, critically conserve valuable and useful ideas, and responsibly transform those understandings through writing, teaching, and application. Stewardship also has an ethical and moral dimension; it is a role that transcends a collection of accomplishments and skills. A steward is someone to whom the vigor, quality, and integrity of the field can be entrusted. The most important period of a steward’s formation occurs during formal doctoral education.

From this perspective, this is precisely the way the existing generation of Islamic scholars/experts and the relevant stakeholders should be approaching this issue and challenge, because scholars/experts of each generation must contribute toward (a) knowledge creation, and (b) education and training of the next generation of scholars and practitioners so that their trainees and students become the “stewards of the discipline”. It is very much a trust (amÉnah) that needs to be acknowledged and appreciated both individually and collectively by our scholars. Indeed, even though the term doctorate is generally traced to the Latin docere, which means “to teach”, Makdisi (1970, 1981) put forward a controversial hypothesis (rejected by Huff, 2003) that “the doctorate has its origins in the Islamic Ijazah.”

Whether Makdisi’s hypothesis is valid or not, in many respects, there are commonalities between a doctoral award and the process of recognition for our scholars throughout history. An important difference, however, is that the former system relies on an established set of guidelines, documented and nearly universal globally, while the other relies on an informal and largely unstructured process to certify the next generation. Building a bridge between the two systems would greatly enhance the transparency and lend a form of credibility to Islamic fields related to revealed knowledge.

At the core of the doctoral system is research, which is meant to result in something substantive and meaningful being added to



the current body of accumulated knowledge, whether the research is analytical/theoretical or experimental/empirical. Indeed, the main purpose of a doctoral dissertation is to provide an advanced and trained seeker of knowledge an opportunity to seek something new in the area of inquiry and thus nudge the frontier of knowledge a little bit. Before solutions are provided, problems should be identified and studied in depth, which is precisely the purpose of research. Unfortunately, the traditional educational preparation in religious establishments lacks any structured and systematic approach to integrate research into their curriculum. This is further complicated by the fact that the established religious traditions tend to think that, broadly speaking, all the fundamental or important issues or aspects have already been identified and therefore what is needed is adherence and application of the accumulated body of knowledge without taking any fresh approach or exploring fresh perspectives.

However, the demand of modern times has been to some extent taken into account by those serving the Islamic finance industry. Many SharÊÑah scholars in the industry already have doctoral (PhD) degrees, and this is especially true for younger scholars entering the field (Kettell, 2010). However, as the industry matures, while this should be standard requirement, it is also an imperative to have well designed doctoral curriculums for scholars and experts that may provide the breadth of knowledge and expertise drawn on the range of disciplines relevant to serving the financial sector and enabling them to develop a relevant research background. Notably, this is an issue not just in the case of the education and training of scholars and experts serving the Islamic finance industry, but also traditional Islamic scholarship in general (See, Farooq, 2011). As an example, while Islamic finance is often presented as a better means to address the problem of poverty and underdevelopment, Islamic scholars have hardly done any analytical, let alone empirical, work on the nature and extent of the challenge of poverty and its persistence (Farooq, 2009).

As the Islamic finance industry is growing, everyone recognizes the importance of bringing maqÉÎid al-SharÊÑah (broader objectives of Islam) into the core of the industry’s activities. What are the main problems concerning this matter? One of the pioneering Islamic economists, Dr. Muhammad Nejatullah Siddiqi (2006) clarifies the role of the SharÊÑah scholars/experts in this regard:



Shariah experts do care for maqasid al-Shariah. As I have argued elsewhere, there are numerous recent examples of fatawa given on the basis of maqasid. The problem in my opinion is not of willingness to take maqasid into account. The challenge comes from the nature of the task in the new environment. These are tasks calling for not only economic analysis but drawing upon latest developments in other social sciences like sociology, psychology, political science and management. Lacking proper institutional arrangements for training to do the task, with its necessary backup in terms of fundamental research, instances of malfunction have been increasing in recent years, causing anxieties in the market and raising the possibility of a backlash in terms of consumer rejection.

Thus, to meet the challenge of the time, education for SharÊÑah scholars needs revamping, which is not possible through the traditional system or curriculum. Even the modern institutions for higher Islamic learning that are making some positive difference may need a transformation (Hashim, 2007). Of course, this cannot be accomplished through obtaining degrees from Western-type universities that may not have the relevant curriculum, focus or specialisation to guide the relevant training and education.

While identifying the doctoral system as a potential framework for qualifying the SharÊÑah scholars, it should be clearly underscored that the doctoral system in higher education is by no means without limitations or criticisms (e.g. Bill, 1996; Wilfred, 2001). Indeed, in some areas of modern science, especially the social sciences, entrenched orthodoxy has developed. Economics is a case in point. Modern economics has built its “scientific” foundation on formal, mathematically complex and elegant models that happen to be based on assumptions clothed in the trappings of rigor and prestige, and yet so far removed from reality that after every major crisis the leading economists have to scratch their heads. In the case of the current on-going global economic/financial crisis, none other than the late Nobel Laureate Paul Samuelson humbly confessed: “What we know about the global financial crisis is that we don’t know very much.” (Kontan, 2008 cited in Lucas Setia, 2011). While Samuelson’s candor is highly admirable, one cannot escape from the fact that underlying this “we don’t know very much” is a world-class PhD education, and the statement applies to some of the most notable economists who have shaped the contemporary world of economics.



A PhD education in itself may not be a panacea for anything. In this particular context of Islamic finance, what is important is to build a system of higher education that combines advanced education, research and a peer-evaluation mechanism that earns confidence in a specialized field/profession and is beneficial in being able to address real world problems. An important premise of Islamic finance is its real-economy orientation. Unfortunately, the reality is that the emphasis on the real economy has found its revered place only in books and rhetoric. The task of studying and understanding the real world, especially in a problem-solving manner, is for SharÊÑah scholars and Islamic finance practitioners as much as it is for anyone else. That is why a doctoral system of higher education, if adopted and utilized, can be beneficial, as long as lessons are learned from the pitfalls of the modern higher education, and those are duly incorporated in the education and training of a new generation of scholars, experts and practitioners.

IV. SHARÔÑAH NON-COMPLIANCE RISKAND DUE PROCESS

To place the relevant issues in context, it is important to note the landmark AAOIFI ruling of February 2008 and Shaykh Taqi Usmani’s statement that preceded it in November 2007 at the World Islamic Banking Conference, which highlighted another set of challenges that the industry lives in fear of on a day-to-day basis. The first is that there is no universal framework of due process that scholars must follow before they issue public opinions contrary to previous opinions expressed by themselves or other scholars. This effectively places the industry hostage to the change of attitude by scholars who have gained prominence through their years of serving the industry. Certainly, such change in attitude must be accommodated, as certain practices that may be tolerated during the embryonic stage of the Islamic finance industry may not necessarily be acceptable when the industry has stronger infrastructure support and is able to influence its institutional environment.

The second issue relates to who can issue these opinions. Can the market determine who issues such opinions (i.e. shareholders appointing those whom they deem to be most appropriate to issue rulings)? Or does a SharÊÑah scholar get recognised from years of recognised service by peers or by a certain community/group of people/followers? As has been suggested by some industry experts,



for jobs related to providing objective independent opinions based on SharÊÑah rules, “the market can be a bad judge as those who charge less for their services and are willing to provide more convenient opinions from the point of view of shareholders will be chosen over the more knowledgeable.” (Al Jarhi, n.d.). Apart from the lack of a widely agreed process of eliciting and establishing a juristic opinion, there is also the issue of ‘fatwa shopping’―“the process of searching for suitable religious opinions” (Hosen, 2008).

The abovementioned ‘fatwa shopping’ takes a whole new dimension when the matter of fatwa is part of a professional process serving the financial sector. This phenomenon has been highlighted by Foster (2009) as follows:

“[A]s one investment banker based in Dubai, working for a major Western financial organisation, explains: “We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a fatwa [seal of approval, confirming the product is SharÊÑah compliant].

If he doesn’t give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”

This is probably an exaggeration, as explained by prominent scholar Sheikh Nizam Yaquby (Aleqt News, 2010). But the perception persists, and it presents a handicap for the credibility of the industry and its gatekeepers. While no system is foolproof, university education and PhD programs are the modern substitute for old education systems since they are more reliable and transparent in a world with less scientific integrity.

One point is clear: SharÊÑah scholars with little formal education, but strong market credibility, may hamper the growth of this industry by issuing rulings which are contrary to generally accepted SharÊÑah principles and without enough formal documentation to explain their rationale. Of course, as is well established, the SharÊÑah scholars generally have a micro-juristic approach focused on the contracts, without considering any macro-level implications. There is also hardly any effort on the part of these scholars to undertake any ex-post study of their own works/rulings/decisions. The resulting shortcomings of all these aspects may impair the reputation of the industry by reducing



the perceived value of the stringent process of deliberation that was originally the hallmark of the Islamic legal system. This is especially important because fatwas issued are often not disclosed, the rationale (dalÊl) is not provided, and any error or major controversy regarding an issued fatwa is never publicly acknowledged.

The SharÊÑah conversion technology debacle sparked by some well-known Western investment bankers’ touting the ability to extract un-Islamic returns from Islamic assets is a case in point (DeLorenzo, n.d.). In that episode, one SharÊÑah advisory firm and scholar’s fatwa was roundly condemned by two other scholars. In hindsight, the main lesson of that debacle was that scholars should consider the macro-level repercussions of their actions when they go about approving Islamic products.

V. WHO GUARDS THE GUARDS THEMSELVES?

The question that then arises is how the industry should best regulate the function of SharÊÑah compliance to address the aforementioned challenges, increase the supply of SharÊÑah scholars and stimulate the sustainable growth of the Islamic finance industry.

It is clear that neither AAOIFI nor any other body can establish a supranational SharÊÑah supervisory board without cooperation from all regulators. Even if such a board was somehow established, it would be presumptuous to expect that it could promulgate unified rulings for all institutions and products in the world. Instead, going beyond professional qualifications for industry professionals, the need of the hour is to promulgate standards/guidelines (that apply across jurisdictions) establishing a transparent set of criteria for being recognised as a legitimate SharÊÑah scholar and the pre-requisite due process for issuing opinions (fatÉwÉ).

As of now, the AAOIFI (2010) Governance Standard No.1, SharÊÑah Supervisory Board: Appointment, Composition and Report, only specifies one vague requirement, which might be better interpreted as a description than a requirement: “A Shari’a supervisory board is an independent body of specialised jurists in fiqh al mua’malat (Islamic commercial jurisprudence).”4 Certainly, it would be worthy if AAOIFI were to supplement this statement by

4 Notably, commercial jurisprudence is an important, but a rather small, subset of muÑÉmalat.



establishing a transparent set of criteria that could be flexible enough to accommodate variances in practice between countries and regions. Similar to other professional bodies such as the CFA Institute or the Institute of Chartered Accountants, the AAOIFI could mandate the required level of experience and education and certify SharÊÑah scholars on this basis. Such bodies must be independent like these existing professional institutes. The experience and education could be from varied sources so long as they are transparent and independently verified. A hypothetical set of criteria could be as follows:

Peer Recognition1. A letter of recommendation from three recognised or certified

SharÊÑah scholars stating that the candidate has the requisite level of SharÊÑah knowledge, experience and acumen to issue and determine opinions on Islamic law relating to commercial matters only. (Recognised SharÊÑah scholars for the purposes of this guideline would be all scholars who currently serve on at least three boards of Islamic financial institutions or infrastructure institutions, and Certified SharÊÑah Scholars would be those who are already certified by AAOIFI.) This is, on the one hand, similar to ijÉzah from the classical Islamic tradition and, on the other hand, equivalent to the modern protocol of letter of recommendation from mentors, professors or peers.

EducationIn addition to the above,2. A doctoral degree from a recognised university (list of universities

that meet certain criteria/standards including relevant curriculum; list to be determined by the SharÊÑah board of AAOIFI and/or other standard-setting institutions), or

3. At least 5 (or xx) years at an established Islamic seminary studying Islamic law (not Arabic only) under a recognised scholar with a diploma from the institution and a letter of reference from that scholar. (Certificates such as the CSAA may contribute to one or two years of relief from Islamic seminary studies or from mentored experience requirements), or

4. Where no formal SharÊÑah-related education is demonstrable, then 15 (or xx) years of mentored experience under a recognised or certified scholar with a letter of recommendation from that scholar must be provided.



ExperienceIn addition to the above,5. At least 10 years of SharÊÑah-compliance auditing or advisory

experience as evidenced by a letter of reference from the Chief Operating Officer (COO) of the financial institution, or

6. At least 10 years of counselling on matters of Islamic commercial law as evidenced by 3 letters of reference from independent professionals or government officers.

Furthermore, there should be a continuing education requirement, which can be substituted for by research output, for continuing certification or affiliation. Guidelines such as the illustrative sample above provide the would-be scholar with a clear set of objectives requiring a combination of education, experience and mentor recognition by which he can plan his career.

The sample guidelines recognise that there is a multiplicity of ways that a SharÊÑah scholar is accepted by his peers and that not all SharÊÑah scholars will need to fit into an exact definition. Needless to say, the AAOIFI SharÊÑah Board or other similar bodies, including the Islamic Financial Services Board (IFSB), would be the best placed to determine the exact requirements, and any such requirements must include the following components in some combination: doctoral research and degree; apprenticeship/experience, and continuing education.

VI. DUE PROCESS

Similar to the challenge of recognising SharÊÑah scholars, the AAOIFI SharÊÑah standards are not clear regarding the appropriate due process to be undertaken prior to issuing an opinion. As discussed, this means that an opinion can be issued without due care or proper consultation of peers. If AAOIFI, along with other standard-setting institutions such as the IFSB, becomes the official or de facto gatekeeper to the next generation of SharÊÑah scholars through a proper, independent certification process, it can also influence this next generation to adopt more stringent procedures when issuing an opinion, without which their certification as a SharÊÑah scholar could be revoked.

For instance, AAOIFI/IFSB could require all certified scholars to provide annual reporting of all fatwas certified by them and the general principles (including arguments and evidence) utilised



by these scholars in coming to their conclusions. Needless to say, for competition purposes, the reporting can be limited to general principles utilised and the product features desired without specifying the exact product details. Alternatively, it could provide the full minutes of the meetings, with the AAOIFI/IFSB being bound to observe confidentiality.

In addition, the AAOIFI/IFSB could require SharÊÑah scholars to adopt a particular form or checklist which they have to address prior to issuing a fatwa.

In return, the AAOIFI/IFSB will stand by all SharÊÑah opinions by certified scholars, as long as they are in conformity with SharÊÑah principles as enunciated by the AAOIFI/IFSB SharÊÑah standards. Where there are new SharÊÑah principles utilised, previously not the subject matter of any standard, the SharÊÑah scholars are to provide an explanation to AAOIFI/IFSB, which will be kept confidential for at least 2 years and up to 10 years at the request of the scholar, after which it will be made available for public viewing.

This process will also help build a disciplined body of Islamic commercial law for Islamic finance that is based on incremental rather than random and unstructured development. All these require a systematic process of recognizing and appointing SharÊÑah scholars serving the industry and ensuring certain standards by which they continue to serve.

VII. CONCLUSION

This paper describes the significant SharÊÑah-related challenges which are constraining the growth of Islamic finance in an attempt to provide some recommended solutions to the regulators such as AAOIFI and the IFSB.

The solutions are meant to enhance and strengthen the position of scholars as the gatekeepers of the SharÊÑah in Islamic finance by establishing a clear set of guidelines by which they regulate themselves and their peers. Clearly, the AAOIFI and IFSB standards have significant influence on Islamic financial institutions, and they would be best placed to establish such a guideline/standard. Furthermore, since this is an area involving practitioners, independent institutions similar to those that grant CFA (Chartered Financial Analyst), CPA (Certified Public Accountant) and other professional qualifications/designations are greatly needed.



Two major consequences may occur if such self-regulation initiatives are not undertaken by the scholars themselves. The first is regulatory capture, wherein, due to the consistent threat of legitimacy facing the role of scholars in Islamic finance, the industry and its regulators (such as the central banks and securities commissions) take it upon themselves to regulate the activities of scholars to ensure that there is minimal disruption to market activities.

The second, and by far the more drastic consequence for the industry as a whole, is that one scholar’s actions threaten to place the legitimacy of the entire Islamic finance industry and its central principle of SharÊÑah compliance in disrepute, thereby dramatically eroding market share of Islamic financial institutions and funds vis-a-vis their conventional counterparts.

It is up to AAOIFI and its peer standard-setting institutions and the SharÊÑah scholars to consider these and other suggestions and come up with a solid governance mechanism for the sake of the industry’s legitimacy in the eyes of the common Muslim and to ensure proper and effective preparation of the SharÊÑah scholars in terms of their education, experience and the ability to serve as “the stewards of the discipline”. Beyond application and praxis, this will enhance the industry’s capacity and contribution in the areas of knowledge creation as well as transfer of knowledge to the next generation.



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