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Islamic Finance: We guide and let the marts decide

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By Rushdi Siddiqui


Question: We are hearing more comments from Islamic bankers who are saying sukuk are bonds with an Islamic wrapper, and the industry needs equity/investment sukuk, what are your comments?


Answer: Let's consider the question and its source and then boil it down to a statement. Islamic investment bankers say they (when they say "the industry" I have to assume they are speaking of themselves) need equity/investment sukuk. Simple answer? AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) has developed them. I have always maintained that the market will determine the direction of Islamic finance. It may well be at the present time that the market for sukuk is driven by the needs of Islamic bankers in treasury departments.


These needs include predictable pricing. Thus, they have their own preferences for certain types of sukuk, maybe not the same types as Islamic investment bankers. And when the saturation point is reached, by which I mean when the treasuries of Islamic banks have sukuk holdings sufficient for their needs, regulatory and otherwise, the secondary market that everyone is hoping for will develop. It's beginning already in a limited way. And I share the frustration of our bankers. But we need to keep working.


Question: A large number of sukuk defaulted in last several years, about 30 from Malaysia with 10 BBA and 16 Murabaha structure. Are defaults a cause for concern or actually beneficial for the industry?


Answer: At the 2005 IFSB conference in London on the subject of law and sukuk, the subject of defaults, then only a possibility, was discussed often and widely.


After all, until there are defaults, it is next to impossible to know how judges will view sukuk. The problem is multiplied when different jurisdictions and legal systems are involved.


We are now, therefore, in discovery mode. And while it is indeed lamentable that sukuk have failed and investors have suffered losses, it is now the responsibility of all involved to study the cases to see what might be done better in the future.


Question: After the Funds@Work study, linking scholars to syariah boards, there have been comments about conflict of interest of scholars, scholars having their own consulting firms, scholars not having enough time to vet through volumes of documents, etc., hence, do scholars actually present a systemic risk to Islamic finance, what are your comments?


Answer: Actually, the Funds@Work study was not at all critical of these relationships. The media, for whatever reasons, attempted to portray the report in that light and thus whip up a storm in a teacup.


The fact of the matter is that the conclusions of those who conducted the study include praises for the industry and its governance policies through the institution of the syariah supervisory board. That members of those boards will be interconnected professionally with other members and other boards is nothing out of the ordinary for board membership.


Moreover, if Islamic institutions prefer the experience and expertise of a so-called top tier of scholars, that too is only natural. Why, after all, would a top-tier financial company want the services of second rate advisors? As I mentioned earlier, it is the market that determines the course of business, including our business.


For the record, in order to demonstrate my own support for the report, I spoke at the launch last year in Dubai!


Question: You have lived and worked in the US before your move to Dubai, what are the obstacles to Islamic finance in the US? Can the US ever become an Islamic finance hub?


Answer: I'm not sure that I'd like the US to become a hub, or any Muslim minority country for that matter. I'd like to see Muslim majority countries, like Malaysia, the GCC, Egypt, Turkey and Pakistan become hubs.


But, back to the US, I believe that Islamic finance has a very good opportunity for itself there, and that there is much to be learned from the few successful businesses in Islamic financial services that have been successful there.


The US market is a highly competitive one, and Americans, including Muslim Americans, have become accustomed to superior services. An Islamic financial services institution that is successful there can be nearly certain of success in other markets.


Also, let me note that despite the negativity towards Islam shown by fringe elements in US society, this is really a non-factor in business. The playing field is even. Non-Muslims account for the great majority of investors in the most successful of all US Islamic mutual funds.


I think the future there is bright for hard working and dedicated professionals who possess a vision for Islamic finance in a Muslim minority setting.


Question: What are the lessons from Malaysia for Muslim and non-Muslim countries that want to have a presence in Islamic finance?


Answer: The lesson from Malaysia is loud and clear. Malaysia is a Muslim society that respects other cultures. As such, it has embraced Islamic finance as a positive influence for its own populace and as a way to work in harmony with people from other cultures and countries.
Malaysian decision makers have framed forward-looking policies for Islamic finance, and Malaysian regulators are proactive in their outlook toward the Islamic financial sector. No other Muslim country has demonstrated even a fraction of the commitment on the part of Malaysia to Islamic finance.


The good news for all of us is that their efforts are paying off.


Question: What has been your biggest disappointment in Islamic finance?


Answer: The only way I can answer is by saying, "Myself". I have allowed business considerations to take priority over the creative, academic work I had charted out for myself years ago. But, in part, it's the old story. When everyone is busy, you give the most demanding assignments to the busiest of all, myself.


As I begin to restructure my professional life and relationships, I am giving myself more time to think, and to share my ideas in different forums. For years I've told people that I'm a syariah advisor to financial institutions by profession and a scholar by vocation, while my true calling is translation! I'm hoping to become a little truer to each of these.


Question: Decoupling from conventional benchmarks started in 1999 (first Islamic equity index by an index provider), then 2006 (first global sukuk index by index provider) and 2011 (Islamic interbank benchmark rate, IIBR), and you have been involved in all the developments, what does IIBR mean for the development of ICM?


Answer: Islamic finance differs in many ways from conventional finance. The most obvious of all those differences is the industry's rejection of interest. However, as a widespread element of transacting in the modern financial markets of the world, interest appears in many diverse forms, including as a measure of market activity.


Indeed, without measures for capital market activity, or benchmarks, no financial institution, Islamic or otherwise, can hope to be competitive or successful. The significance of the IIBR is that it provides the industry for the first time with a true measure of exclusively Islamic capital market activity.


Syariah-compliant finance does not deal in interest. Why then should it continue to rely on an interest-based benchmark like Libor? In another major step towards establishing its own unique credentials, the industry has developed a measure of its own interbank market activity based on the ways in which Islamic financial institutions actually transact among themselves.


To my mind, this development, involving close cooperation between more than 20 of the largest Islamic banks in the world, represents a major landmark in the development of our industry and TR is to be lauded for its efforts in bringing this project to fruition.


Question: Finally, let's look at 2015. where do we see Islamic finance in the Arab Spring countries and in Southeast Asia? Will Malaysia have an impact on the Arab Spring countries for Islamic finance?


Answer: You're asking someone for whom the book, "1984" was a look far into the future when I first read it. My hope is that the Muslim world will continue its quest to come to terms with its religious and cultural identity as an active and contributing part of a larger global society; and that they will turn to the syariah and its principles for solutions to problems in every aspect of life, especially in finance.


The time has surely come for Muslims to insist on doing things the Islamic way. I cringe at the thought of the Arab Spring countries entering the downward spiral of debt that will surely come if they turn to conventional finance for their building and rebuilding needs. (See what the EU is doing to Greece and Portugal, their so-called friends!) If the Arab Spring countries are to be successful, they will need to avoid the international debt trap and seek instead the investment partnership of the world community, and especially their closest friends in the GCC and Turkey.
In fact, the Arab Spring presents our industry with its first great challenge. Let's see how we meet it.


[Rushdi Siddiqui is Global Head of Islamic Finance and OIC Countries at Thomson Reuters. He can be contacted at rushdi.siddiqui@thomsonreuters.com]


(Courtesy: Business Times, Malaysia)
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