Towards Standardization of Islamic Banking Products

1. بسم الله الرحمن الرحيم Muddassir Siddiqui Partner SNR Denton, Dubai Towards Standardization of Islamic Banking Products Nairobi - March 29, 2011

2. Benefits • Predictability • Cost reduction • Consistency, harmony • Risk mitigation • Single bench mark for performance • Dealing with multiple Shari’ah Boards • Syndicated financing - Restructuring

3. Challenges • Standardization is the by-product • Standardization requires • Shari’ah standards and views • AAOIFI, Fiqh Academies • Multi legal jurisdiction • Accounting treatment • Enforcement • Self regulated V. Regulatory authority • Transparency

4. Consensus of Shari’ah Views • ولو شاء ربك لجعل الناس أمة واحدة ولا يزالون مختلفين إلا من رحم ربك-هود • Many schools of Islamic laws – biggest challenge • History • Muwatta, Fatawa Alamgiri, Usmani Majallah, OIC International Islamic Fiqh Academy, Al-Azhar University, AAOIFI, IIFM etc. • Shari’ah position not consistent – example tawarruq • Disagreements within a single SSB • Example - tawarruq

5. Consensus of Shari’ah Views, cont. • Use of fictitious contracts • Islamic finance is still at and embryonic stage • Work in progress • AAOIFI Standards are new – first edition • Need revisions in the light of practice and experience • Sukuk example • Premature to standardize while the Standards are new • Needs review in light of lessons learned

6. Multi Legal Jurisdictions • Most central banks regulate the industry but refrain from regulating the products • Few Central Banks with central Shari’ah control • Malaysia, Pakistan, Sudan • standardization v. innovation – both are needed –balanced approach • Individual SSB operate independently • IFI desire confidentiality

7. Accounting • Inconsistent treatment between AAOIFI and International accounting standards • Leases • Substance over form

8. Enforcement • Shari’ah risks – TID v. Blom • Various courts have various approach • contract invalid – Board of Grievances • Re-characterize the contract - Dubai • Some terms invalid – early payment discount • Use of fictitious contracts makes enforcement unpredictable • Commercial reality v. form

9. Suggestions • Central Shari’ah Board • Qualified members of Shari’ah Board • Multiple discipline – law – finance - accounting • Transparency • Fatwa should mention the basis • Separate entity for external audit • Products based on: • Objectives of the Shari’ah, rationality, reality of the relationship between the parties

10. Thank you • شكرا • و السلام عليكم و رحمة الله و بركاته