Malaysia is pushing for its one-year old rules overseeing Islamic scholars to be implemented globally in a push for more rigid governance.
The Southeast Asian country, the world’s largest market for Islamic debt, established the industry’s first code of conduct in December 2013 for experts who vet financial products for conformity with Shariah law and is targeting their adoption overseas, Aznan Hasan, president of the Association of Shariah Advisors in Islamic Finance, said by e-mail Monday. The rules cover accountability and salaries, said Aznan.
Islamic finance institutions require rulings from scholars, known as fatwa, before they can sell securities or funds in an industry that Ernst & Young LLP projects will double to $3.4 trillion in assets by 2018. Ensuring that consistent standards are adopted would require coordination between the key markets of Asia and the Middle East along with effective sanctions to ensure compliance.
“It’s admirable that ASAS has sought to formalize a professional code of conduct and ethics,” Gregory Man, a lawyer who advises on sukuk transactions with Norton Rose Fulbright, said in a Feb. 19 e-mail from Dubai. “Having said that, the code should really be a case of simply formalizing what I would generally view as the expectation of Shariah advisers by Islamic finance market participants.”
Islamic law forbids the payment of interest and involvement in businesses deemed as unethical such as those associated with gambling, alcohol or prostitution. It promotes risk-sharing and discourages speculation. Funds raised from Shariah-compliant bonds have to be used in an ethical manner and the underlying assets backing the debt also have to conform to religious principles.
Scholars overseeing investment products have come under scrutiny because they tend to sit on multiple Shariah boards, leading to concerns about conflicts of interest and excessive salaries. One industry expert was advising 101 institutions, Islamic standards-setting bodies and other entities, according to a 2011 report by Funds@Work AG, a research firm based near Frankfurt.
In Malaysia, a global Islamic finance hub, the central bank restricts Shariah advisers to only one board for each type of financial institution they represent. In a move to further tighten oversight, regulators prescribed jail terms and fines for errant scholars in 2013.
The Malaysian association’s code prohibits scholars from advertising their services, imposes curbs on disclosure of information and regulates their remuneration. These rules aim to ensure advisers maintain “a high level of professionalism and proper work ethics in discharging their duties and responsibilities,” according to the code.
“To have these ethical principles written up as a rule book for Shariah scholars is a positive development,” Mohamed Ali Elgari, a Jeddah-based Shariah board member at National Commercial Bank and Credit Agricole CIB, said by e-mail Feb. 19. “It will go a long way in assuring quality and integrity.”
The move to improve governance of the $1.7 trillion Islamic finance industry comes as a growing number of new markets embrace Shariah-compliant finance. The U.K. became the first non-Muslim country to sell sukuk in June 2014, followed by debuts by Luxembourg, Hong Kong and South Africa. Worldwide issuance of sukuk climbed to $46.3 billion in 2014, shy of 2012’s record $46.8 billion, data compiled by Bloomberg show. Sales so far this year total $1.8 billion.
The role of scholars came under the spotlight after a proposed sukuk sale by Goldman Sachs Group Inc. in 2011 drew criticism for not complying with a requirement under Islamic law that it be traded at par. The plan triggered calls for stricter supervision by religious experts. 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.
Differences of opinion on what’s Shariah-compliant can arise due to the varying interpretations of Islam’s teachings. Standard-setting institutions from Indonesia to Bahrain are trying to agree on common principles to aid industry growth.
While the Malaysian association’s code of conduct would ensure greater accountability for scholars, the industry needs to address long-standing issues such as a lack of common standards to ensure global application, according to Norton Rose’s Man.
“The effectiveness of any code of conduct will ultimately depend on whether the compliance can be effectively policed,” Suhaimi Zainul-Abidin, treasurer of the Gulf Asia Shari’ah Compliant Investments Association, said in a Feb. 27 e-mail from Singapore. “This can be challenging for any profession, but possibly more so for the Shariah scholar profession where there is little by way of licensing or accreditation.