BANK KESHAVARZI IRAN

NEWHORIZON Muharrum–Rabi Al Awwal 1429
INTERVIEW
the case, then you’re getting a critical mass –
and once you get it, there will be enough
products, enough depth in the market for it
to have its own benchmarks.’ There will be
no need to use LIBOR (London Interbank
Offered Rate, an internationally recognised
interest rate) or to refer to LIBOR as a
benchmark. Islamic finance will have its
own rules, regulations, documentation,
standards and so on.
In Dawood’s view, the first generation
of products were an adaptation of
conventional products and in some cases
the scholars accepted them on the basis of
necessity. ‘Now the scholars are saying “It’s
time to move on”.’ Recently there has been
some controversy over sukuk, and before
that it was over commodity murabaha and
also hedge funds. Initially, the hedge funds
were based on salam contracts but these
were deemed not acceptable. So people
went back to the drawing board. Salam
contracts have been replaced and funds are
now based on arboun. ‘Development is
taking place,’ observes Dawood. Similarly,
when referring to the recent debate
surrounding sukuk, he believes that ‘these
things have been moving away from the
original concept to a point where it’s
becoming unacceptable to the scholars.
Now they’ve reined them in.’
Dawood notes that it is not just the form
of the contract but also its end-purpose
that the scholars are interested in. As an
example he points out that ‘the wa’ad
contract is a promise from one party to
another to fulfil in the future; a totally
acceptable contract with specification and
such’. The end-consequences are important,
he emphasises. ‘If you do all of this to
achieve something and the endconsequences
are not acceptable then
you’ve circumvented the contract’s essential
nature.’ So, for example, the question of
benchmarking to a hedge fund becomes
an issue if the hedge fund has an income
from an unacceptable activity.
‘There will be evolution on all fronts,
because it’s a very young industry,’ projects
Dawood. ‘But it can be controlled and
should be in the essence of what it is
expected to be.’ The scholars have a central
role in this control as well as in helping the
market to develop. His belief is that the
scholars’ views are important opinions
because of their knowledge, and that the
industry needs their interpretation of
earlier precedents. He says that ‘things
have changed in 1400 years from those of
the Hadith, and today’s world is a very
different world’. What the scholars are
doing is interpreting what may have been
the case and how it would have been
interpreted then based on certain
precedents.
‘A client may expect a Shari’ah scholar to
be a scholar, a banker and to know about
transaction structure; and they want him
to be a lawyer and an accountant as well.
That’s asking a lot,’ he notes. In the future,
people may refer to the scholars of today
and to their precedents, so their involvement
and contribution are essential. Dawood
stresses that it is important to get the
scholars engaged early in the product
development process, virtually from Day
One. They can guide as to what direction
to follow, or suggest options and warn
about potential pitfalls. ‘It is like a pilot
guiding a ship into port,’ says Dawood.
‘They take you into it in the right way.’
‘We have got to deal with the scholars and
we have to pay them, but in the end it’s a
development cost,’ he continues. Once a
product is developed and the standardisation
is there, the costs will reduce. If one
Shari’ah board has created and devised a
product and given it a fatwa, the bank that
has developed the product will try to place
it with other institutions as investors. If
successful, this means the Shari’ah boards
of those organisations have also seen and
accepted the product. ‘So you have 20 or 30
scholars that have cleared it. Surely that
becomes a standard?’ Then, if a standardsetting
body adopts a product, it should
understand the changes for tax and the legal
implications and get the approval of legal
firms, central banks and regulators. ‘Once
that’s cleared, you have a product that you
can use anywhere in the world, in those
jurisdictions as you need them,’ explains
Dawood.
But he disputes the notion that once the
industry is standardised then there will be
I have heard that by 2025, about twelve per cent of the world’s
banking will be Islamic banking.
no further need for scholars. He feels that
even if the investor knows that the product
is acceptable, the Shari’ah board still needs
to monitor the use of that product. As an
example of productive monitoring he
cites an example of the US-based energy
company, Enron. One year before Enron
went bust, the scholars insisted on removing
this company from the Dow Jones Islamic
Market Index, because of unacceptable
debt ratios. The core principles of Islamic
finance and the prudence of the scholars
acting according to those principles meant
that Islamic investors were out of Enron
‘before it went belly up’.
And for the future of the industry, Dawood
thinks it is the international business centres
that we should be looking at. He cites
Singapore with its efforts to accommodate
Islamic finance and also the UK, which
is being ‘very, very proactive’. Financial
centres such as Dubai International
Financial Centre (DIFC) in Dubai, as well
as those in Bahrain and Malaysia, will
play significant roles in the maturity and
internationalisation of Islamic finance. As
for the US, it is currently ‘behind the curve
a little bit’, but once it decides to implement
the changes, these will be done ‘very
strongly and very thoroughly’ (for more
information on developments within the
Islamic finance industry in the US, see
NewHorizon, October–December 2007).
The US economy is ‘one of the biggest
components of the engine of the world’s
economy’, emphasises Dawood, and it
cannot possibly be ignored. The US, in its
turn, cannot ignore the Islamic market;
therefore, ‘both have to work together for
the future’.
www.newhorizon-islamicbanking.com
IIBI 19