Shari’ah authenticity is fast becoming a hot topic as the fall-out from the Dana Gas case, to be heard later this year (2017), continues to emerge. The issuer company is refusing to repay holders of its sukuk having received legal advice indicating that the bond, which they themselves issued, is no longer Shariah-compliant in the UAE therefore rendering it unlawful. Creditors counter that regardless of any recent changes in Islamic finance interpretations the sukuk was compliant at the time it was issued and should therefore be honoured. Maintaining the integrity of Shariah compliance is the core function of Shariah governance and the outcome of this case could considerably impact confidence in the authenticity of both the sukuk market and the Islamic finance industry as a whole.
With consumer and regulatory demands increasingly focusing on trust, transparency and accountability, corporate governance has become a critical challenge for all financial institutions. In particular, this trend has shone a light on Islamic financial institutions, where in-house boards of Islamic scholars self-regulate the institution’s Shariah compliance, raising questions around whether the current model of governance is fit for purpose. This theme was debated in London last October at the Islamic Finance Council UK (UKIFC) / International Shari’ah Research Academy for Islamic Finance (ISRA) Thematic Workshop which brought together local and international experts from Malaysia, GCC, Pakistan and elsewhere to explore issues relating to Shariah governance, regulation and business ethics.
The Bank of England (BoE) shared its current views on Islamic finance and the challenges in regulating the Shariah governance process as a secular regulator. With no UK legal requirement for Islamic financial institutions to have their own Shariah board the BoE’s policy approach is to seek to create a level playing field for Islamic finance vis-à-vis conventional finance. The focus of the Financial Conduct Authority is therefore on product disclosures (i.e. ensuring that statements relating to Shariah compliance are accurate), leaving it to the consumer to determine if they are comfortable with the interpretation of Shariah presented.
At the Workshop the UKIFC and ISRA launched a pioneering report exploring the potential role for External Shariah Audit in providing an additional independent check on the work of Shariah scholars.
The report seeks to strengthen Shariah assurance by calling for external Shariah audit to be made mandatory in Islamic financial institutions across the globe. The report was compiled on the basis of 30 in-depth interviews, including input from Central Banks in Bahrain, Malaysia, Oman and Pakistan along with AAOIFI and IFSB and financial institutions and audit firms.
The report’s findings indicated that while stakeholder feedback was broadly in favour of moving to a mandatory requirement for external audit, significant challenges remained in relation to the availability and experience of potential auditors and in defining their scope of work. The question of the public disclosure of external audit reports also remains a thorny issue.
An audience poll conducted at the event yielded the following results:
- 56% thought that the current model of Shariah Governance is NOT sufficient
- 76% felt that external Shariah audit WILL strengthen Shariah Governance
- The main barriers to the growth of Islamic finance in the UK were considered to be lack of knowledge and inadequate financial resources.
The integrity of Shariah will remain at the core of Islamic finance as without this it will lose its fundamental differentiator. Thus, ensuring robust Shariah governance frameworks are established that evolve with the growth of the industry and assist all stakeholders – including scholars – remains paramount. This will require a combined and co-ordinated global effort and the City, as a leading global financial centre, remains committed to playing its part in continuously improving governance frameworks. Pioneering initiatives led by the UKIFC, such as the world’s first CPD programme for Shariah scholars on conventional finance (since adopted by regulators around the world) and the seminal work on external Shariah audit mentioned above, have emanated from London, reflecting not only its ability to add value and provide thought leadership but also its commitment to work together with global partners in developing the Islamic finance industry.
Advisory Board Member
Islamic Finance Council UK (UKIFC)