Goldman sukuk shows Islamic finance lacks transparency

Euromoney, March 2012

In February, word began to circulate that Abu Dhabi Islamic Bank’s Shariah advisory board had rejected a proposed sukuk programme from Goldman Sachs as inappropriate for Islamic investment. Lacking formal confirmation from either party, observers in the industry immediately started trying to second-guess the outcome and reasoning by looking at who was on the Shariah board.

This is a fairly easy game to play, since the same handful of scholars appear on almost every major advisory board in the Middle East and among international banks active in the Islamic world. So, for example, Bahrain’s Nizam Yaqouby is on the ADIB board; he’s also on Islamic Bank of Asia, Barclays, BNP Paribas, Dow Jones, HSBC Amanah, Citi Islamic, and a host of Middle Eastern names. Mohamed Ali Elgari of Saudi Arabia is also on the board; he rubs shoulders with Yaqouby at HSBC, IBA and Dow Jones, among many other places. We know, and the industry knows, that these are probably the two most widely-represented Shariah scholar voices in the world, and that they have a track record of working towards finding a way to make innovative products Shariah-compliant.

But also on the board is Taqi Usmani of Pakistan, a former Supreme Court judge and a teacher at Karachi’s Darul Uloom Islamic university; he is known as being more conservative, tends to serve on Middle Eastern and Pakistan Shariah boards (such as Meezan Bank) rather than the internationals, and is best known these days for prompting a ruling by the Accounting and Auditing Organisation for Islamic Financial Institutions saying that 85% of Gulf sukuk were not compliant with Islamic law in 2007.

Correspondingly, investors and bankers are trying to work out from these and the other two scholars on the board what the objections are likely to have been, and from whom.

This is interesting enough as a diversion, but it speaks to a number of problems with Islamic finance. One is that despite efforts to boost the number of Shariah scholars – particularly in Malaysia – there is such a small number with the necessary range of experience, skill, language and financial nouse that it can’t help but look like a cartel of the same half a dozen people turning up absolutely everywhere, making the same decisions. It is such a difficult skill set to achieve that it will take decades to relieve this problem adequately, but in the meantime, it’s a major bottleneck for Islamic finance development and just doesn’t look good.

The other problem is a lack of transparency in fatwa, the rulings given by Islamic institutions. No doubt if ADIB does formally decide the Goldman sukuk are not compliant – supposedly because the assets are not sufficiently ring fenced for Islamic finance, instead supporting Goldman as a conventional institution – it will explain to Goldman why that is. But other issuers and advisers want more clarity on just why something is or is not compliant, what the reasoning was, and how to apply it to their own deals. Ideally they want a database. Lacking such transparency, this is what we end up with: Usmani probably said this, and Yaqouby probably said that, and Elgari probably came down on that side, and here we are.

One could argue that the small number of elite scholars ought to help bring consistency and standardisation to Islamic finance around the world, easing the differences between Malaysia and the Gulf in particular, but that’s a red herring: you don’t actually need complete uniformity of approach in the Islamic world for the system to work. Yes, it makes it easier to sell a Malaysian sukuk in Saudi if the rules are the same, but in practice an advisor simply has to opt for a level of conservatism that fits every market the client wants to sell in. The differences, if anything, prompt innovation.

So ignore the calls, at every single Islamic conference you attend, for integration and innovation; that’s not the point. Call for more long-term measures to broaden the number of top-ranked scholars, and for greater transparency in the rulings they come out with. That’s what the industry needs.