Sukuk A Sharia Advisory Perspective
Vol. 4, Issue 29 20th July, 2007 www.islamicfinancenews.com1 Sector Report
By: El Waleed M. Ahmed Legal Consultant, Head of Foreign Affairs Department, Kuwaiti Lawyer Firm (Yaqoub Al-Munayae & Aisha Al-
Shaiji Law Firm), Kuwait. firstname.lastname@example.org
Sharia law is open to interpretation and religious boards frequently hold different views on
key Sharia issues. Furthermore, Islamic jurisdiction is not bound by precedent and legal
opinions may deviate from previous decisions made by other Sharia scholars. Thus, a
Sharia board has considerable discretion in the interpretation of Islamic law and may
choose any school of thought to inform its decision-making process.
Sharia boards in the Middle East and elsewhere that approve Islamic Sukuk for sale to
Muslims hold slightly different interpretations about what is acceptable, making Islamic
investor nervous about buying Islamic bonds from outside their own jurisdiction. Complex
Sukuk structures involve challenging procedures and require extensive and costly advice –
both legal and religious – in addition to diverse sets of skill and resources to make them
work. Therefore, corporations and banks often shy away from such structures due the legal
risks and the potential costs of pioneering such instruments. Notwithstanding this, Sharia
is dynamic and, like all jurisprudence, is open to various interpretations.
The Achilles’ heel in the global acceptance and growth of Islamic finance is the level of
standardization of Sharia boards’ rulings. There is yet to emerge a consistent ruling of
Islamic law on the religious compliance of certain assets and transaction structures in
terms of Sharia law. Sharia boards from different Islamic financial institutions may have
different interpretations and advise differently because, in Islam, there is no generally
accepted codification of the jurisprudence. In a conventional sense, that can lead to
uncertainty and confusion.
Detailed explanations of Islamic finance principles or definitions of the role of a Sharia
board in an Islamic financial institution are not delved into in this article, as these are
rudimentary issues for readers if Islamic Finance news. Rather, here we will look into the
absence of standardized Sharia board rulings at the national and international level, an
issue that may have negative effects on the growth and acceptance of the global Islamic
finance industry. Furthermore, the necessity for a unified Sharia board at a national and
international level is highlighted. Recommendations are also made regarding the role of
the Sharia board in the harmonization and configuration of various Sharia board rulings
across the globe to develop new Islamic finance instruments.
1www. Islamicfinancenews.com, specialized online Islamic finance publication from Malaysia
Functions and role
Broadly speaking, the three key functions of Sharia boards are:
• to provide advice to Islamic financial institutions;
• to supervise and audit transactional procedures of Islamic financial institutions; and
• to supervise and actively participate in the creation of innovative Sharia compliant
investment and financing products and services.
The effects of non-standardized Sharia rulings
Uncertainty and confusion
The absence of a universally accepted central religious authority is largely a result of the
lack of uniformity in religious principles applied in different Islamic countries across the
world. Sharia boards at individual banks have their own way of defining what is and is not
Islamic banking. This results in different transactions being interpreted differently, hence
leading to a single identical financial transaction having various interpretations across
different Sharia boards. This causes uncertainty about what is the acceptable way to do
business in the Islamic banking and finance system. Further, the assessment of risk for
both the financial institution and the customer can become complicated. The way Sharia
advisory boards of Islamic financial institutions function thus remains a source of
The difference in interpretations of Sharia laws means that one Islamic bank may not be
able to “copy” another Islamic bank’s products, and this can stifle the growth and
integration of Islamic finance at both national and international levels.
The lack of standardization is a contributory factor to the sluggish trading level on the
Sukuk market. This prevents investors from knowing what risks they are assuming when
they invest and increases the costs associated with Sukuk issuance.
Conformity or similarity among the Sharia supervisory boards of Islamic financial
institutions is urgently required to extend the possibilities in concept and application in the
industry. Establishing Sharia boards at a global and Central Bank level is required to
expedite and develop some standard guidelines in the conduct of Islamic financial
transactions. Standardization is necessary to circumvent any contradictions and
inconsistencies between different Fatwa rulings and their application by these institutions
with a view to activating the role of the Sharia supervisory boards of Islamic financial
There is also the important factor of mutual recognition of financial standards and
products across jurisdictions. The progressive harmonization of Sharia, in this respect,
needs to be viewed as an attribute towards greater international financial integration.
Moreover, supervision and regulation at the national and regional levels are necessary
safeguards against potential improper practices. Such improper practices can cast a doubt
on the credibility of all participants. Sharia scholars from around the world should
contribute towards greater understanding and international convergence. Such
convergence and harmonization can only happen with greater engagement among the
regulators, practitioners and scholars in Islamic finance in the international community.
The existence of a unified Sharia board via a council representing different Islamic school
of thought, nationally and internationally, is necessary. This would facilitate the
conformity of different types of financial services to Islamic law and in addition would
define cohesive rules to expedite the process of introducing new products.
The early engagement of a Sharia supervisory board in an Islamic financial institution,
together with other financial personnel, in the creation of a new Sukuk is of utmost
importance so as to build a solid Islamic foundation for the new product. It also paves the
way for speedier creation of the Sukuk. Furthermore, it is crucial that the Sharia board
actively participates in the creation of Sukuk, in addition to their supervisory role.
In order to promote a global standard for Islamic finance instruments, there are a couple of
key steps that must be taken.
Adoption of AAOIFI standards
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
has taken the lead by preparing Sharia standards. These have been adopted by a number of
government authorities and Central Banks, which will form an avenue for Sharia
compliance and also product innovation.
Cooperation and collaboration
Collective effort with international collaboration between major Islamic financial
regulatory bodies such as the Islamic Financial Services Board (IFSB), AAOIFI and
Central Banks in Islamic countries is important in strengthening the fabric of Islamic
Islamic finance instruments, particularly Sukuk, are becoming an increasingly important
consideration – for both Muslims and non-Muslims – from the perspective of investment
and product innovation. The issuance of Sukuk is a vital mechanism for raising money in
the capital markets. Sukuk have unique characteristics and offer significant benefits,
unlike other Islamic banking vehicles. At the same time, a few recommendations are
essential for continuous improvement of the functions of Sharia boards and for achieving a
global standard for Sukuk. These are as follows:
(1) Training in economics, investments and legal issues related to investments and product
innovation. The lack of knowledge about modern economic and legal issues can weigh
down the ability of Sharia scholars to issue well-informed rulings on financial
products and investment activities.
(2) Placing specialized Sharia scholars onto separate Sharia boards for different projects to
work more efficiently on projects best suited to their particular areas of expertise. This
process will ensure that the right scholars in the right numbers develop, certify and
supervise the financial products and services endorsed by Islamic financial institutions.
(3) Sharia boards should be independent from financial institutions to ensure transparency
and efficiency when giving opinions on the proposed contracts and transactions.
(4) Working closely with financial institutions and lawyers so as to develop new Islamic
(5) There is a nagging concern about the availability of suitably qualified Sharia advisors.
Their numbers need to be increased in order to avoid stretching the current advisors.
This will allow more Sharia compliant transactional procedures and more time to be
spent with economists and investment practitioners to develop new Islamic financial
(6) Financial institutions need to develop operating procedures to ensure that no form of
investment or business activity is undertaken that has not been approved in advance by
the religious board.
(7) From the outset of the Sukuk structure, Sharia advisors should make an inspection to
ensure the product concept and its process flow is fully implemented according to the
Sharia. Sharia advisors and lawyers should work hand in hand to thoroughly review
the terms and conditions of the Sukuk contract.
Flexibility is a major strength of Islamic finance. This implies that a broad variety of
products can be tailored to each client’s needs. The difference in opinion between rulings
of different Sharia boards is in a way advantageous, as it brings about more innovation
and creates new room for Sukuk structures and Islamic finance instruments. In the process
of providing remedies, the principles of Sharia are not to be compromised as they are
essential in dynamic markets like the current Islamic financial market.
Saturday, October 27, 2007
Sukuk A Sharia Advisory Perspective