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05 April 2012

Key-Person Risk in Islamic Finance

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By Rushdi Siddiqui


We already know about displaced commercial risk, credit, liquidity, operational, Shariah non-compliant, and markets risks in Islamic finance. What about ‘key-person’ risk in Islamic finance?
What does a former Minister of Economy of France (Christine Lagarde), former Prime Minister of United Kingdom (Gordon Brown) and former under Secretary for International Affairs, US Treasury (John Taylor) have in common? They were all high profile public sector personalities pushing Islamic finance in their respective jurisdictions, and, upon leaving office, the movement’s momentum has been meandering or has stop ‘cold’ in the tracks.


The key-person risk at public sector and Shariah scholar level may be more acute in Muslim countries that are Islamic finance hubs. For example, in Malaysia, the central bank governor, Dr Zeti Akhtar Aziz, has been referred to as the ‘first lady of Islamic finance’ and ‘a governor’s governor’ for Islamic finance. She has been the ‘voice, face and will’ for Islamic finance not only in Malaysia, but also a roving global ambassador of the movement.


Governor Zeti’s many contribution includes establishing educational and research institutions, INCIEF and ISRA, respectively, leading Islamic industry body, IFSB, and most recently an eleven (11) country backed, including UAE Central Bank, trans-jurisdictional entity to address shorter term liquidity, International Islamic Liquidity Management (IILM). She has recently agreed to another five year term as the central bank governor of Malaysia, but, say, if she did not extend and enjoy the well deserved post-public sector life, would a ‘Largarde, Brown and Taylor’ type vacuum been created in Islamic finance, especially as ‘no’ news leaked/announced about a successor?


In Malaysia, the Chairman of the Securities Commission, Zarinah Anwar, announced she will retire at the end of this month, March. She has been also been a high profile proponent of Islamic finance, and there is much confidence in her (internal) successor, Rangit Agit Singh. The transition from Anwar to Singh may just be a model template on successor process at public sector level where Islamic finance personalities are involved.


Scholar Risk?


Does the same key-person risk apply to the top Shariah scholars, especially those sitting on 30, 40, 50 Shariah boards, advising the $1-trillion industry? These scholars, Nizam Yaquby (Bahrain), Mohamed Elgari (Saudi Arabia), Abdul Sattar Abu Ghuddah (Syria), Mohammad Taqi Usmani (Pakistan), Mohammad Daud Bakar (Malaysia), Hussain Hamid Hassan (Egypt/Dubai), Yusuf Talal Delorenzo (US/Dubai), and others, are the ‘gatekeepers’ to the industry. Some of the scholars have resigned from the many Boards to undertake research, and others are getting older with the usual health issues associated with age.


[In the US, the President and Vice President do not travel together for obvious security issues, does it make sense to say (by whom?) that the top scholars should not board the same plane for conferences? QUERY: Where are the new generation of scholars that we have been hearing about to take the mantle from these pioneers?]


Private Sector Transition


In contrast, it appears that when private sector and Islamic (finance) industry body figures move on, they do not create the same ‘vacuum of loss’ influence as public sector and scholars. For example, when the names associated with ‘founding’ Islamic finance at HSBC Amanah, Citi-Islamic, Dow Jones Indexes, AAOIFI (Accounting & Auditing Organization of Islamic Financial Institutions), IFSB (Islamic Finance Services Board), etc., moved on, these entities have managed not only to survive, but thrive to next level of growth and development. Thus, it seems there is a deep ‘bench strength’ in the private sector and industry bodies.


QUERY: Do Islamic banks, like Bahrain based Arcapita, recently filing for Chapter 11 bankruptcy (reorganization) in US, present a ‘key-institution loss of confidence risk?’


Personality to Institutions


As with any embryonic industry that has matured over time, be it technology led Steve Jobs at Apple or Bill Gates at Microsoft [too early to talk about, say, Mark Zuckerberg and FaceBook], the transition from personality to institutionalization is also needed in Islamic finance. For example, the unfortunate early death of Steve Jobs has still allowed Apple to continue moving forward with his vision, its market capitalization reached $570-billion recently. Put differently, today, Apple’s market capitalization is larger than all Muslim country GDP, except Indonesia, Turkey and Saudi Arabia.


Today, Islamic finance can be viewed as privately held, family owned companies in, say, the Middle East. The first generation company owners, much like the early pioneers of Islamic finance Saleh Kamel (AlBaraka), Saeed Lootah (Dubai Islamic Bank), Prince Faisal Al Saud (DMI), toil long hours in building the factories, products, customer base, brand, so on. If something adverse happens to the founder of company during the formative years, it typically results in the collapse of the company.


The next set of risk is successor planning for the next generation, and Islamic finance, today, is at the successor planning stage. The successor blueprint, be it a central bank governor or Shariah ‘rock and roll’ stars, must be well pre-planned and transparent, as the industry needs to consider ‘key-person’ risk as part of bench-strength build-out.


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


(Courtesy: AlifArabia)

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