The Middle East may be the spiritual home of Islamic finance, but the region needs to decide in which direction the practice is headed.
Islamic finance in the Middle East is at a crossroads. In one direction is a brave new dawn of standardised norms, efficiently-issued fatwas and a greater array of financial products. On this route the Middle East would continue to dominate the sector globally, but would risk losing the spiritual and philosophical premise of Islamic finance itself. Going down the other path would see a return to the essence of the discipline, resulting in spiritual significance and moral authority, but potentially a resultant loss of ground to jurisdictions such as the UK or France.
Oliver Agha, name partner at Abu Dhabi-based Agha & Shamsi, who prides himself on running “the world’s only sharia-compliant law firm”, sums up the gravity of the situation facing not just the Middle East but jurisdictions worldwide.
“There’s a struggle for the soul of Islamic finance,” he argues. “There has been a strong pull to commercialise Islamic finance so that it becomes indistinguishable from conventional finance. Many earlier structures reflected ‘replication of conventional banking structures’ and were essentially conventional structures in Islamic garb. Many of the sukkuk structures in the market reflect this ‘replication’ and in fact have been called into question by scholars.”
But Ayman Khaleq, an Islamic finance specialist and partner at Vinson & Elkins based in Dubai, feels that the Middle East needs to act fast to prevent up-and-coming jurisdictions, including the UK, France and Luxemburg, from seizing the initiative.
“Islamic countries are complaining that the UK government hasn’t lived up to its commitment to issue a sukkuk, but my view is that no Middle East country, bar Bahrain – and if you count the quasi-government bodies in Dubai – has done so,” he says. “If the Islamic world isn’t careful the US, or another jurisdiction, will issue a sovereign-backed sukkuk before, for example, Saudi Arabia, and that will be a cause of serious embarrassment.”
That could happen sooner rather than later. The granting of Royal Assent for the UK 2009 Finance Act, which removes the tax obstacles to sharia-compliant structures, is paving the way for the development of Islamic finance here. This is already being reflected in an increased demand for Islamic finance lawyers. The Lawyer has spoken with two firms that are in the process of recruiting into this area in London. However, Omar Kabbani, Middle East recruiter at Fox Rodney, says demand outweighs supply.
“Some law firms are awake to the fact that London could be a European hub and are starting to make enquiries, but there aren’t that many Islamic finance lawyers left in London, so we’ll see a ‘retuning’ of lawyers working in related disciplines to become Islamic finance specialists,” he says.
Khaleq points to the lack of standardisation and institutionalisation in the sector as being factors undermining the development of Islamic finance globally.
“There are four different schools of jurisprudence within Sunni Islam alone,” he says. “Each one interprets transactional matters in differing ways. There’s a need for greater harmonisation in the fatwas being issued, even if such harmonisation falls short from an outright standardisation.”
But Agha rebuts this view. “When people claim there’s lack of standardisation in Islamic finance they’re missing the point. Islamic finance isn’t about producing widgets to specification and selling them en masse with the ‘Islamic label’. It’s a spiritual discipline where any financing has to genuinely comport with Islamic principles of jurisprudence.”
But Islamic finance lawyers in the Middle East might not be throwing in the towel before the advances of the foreign competition. First, most of the sharia scholars are based in the region and so any products developed in the UK will ultimately rely upon sanction by sharia boards overseas. Second, those sharia boards are bulking up further and are mooting bringing lawyers on board.
“At the moment board members don’t need any formal qualification, but there’s a trend in Saudi to start recruiting lawyers and accountants to sharia-compliant boards,” says Hussein El Zein, Middle East recruiter at Sheffield Haworth.
Additionally, having an active office in the Middle East is going to be a huge advantage to firms wanting to win work in the UK because it will supply them with the necessary investment contacts.
Furthermore, the religious history and the legislative codes that underpin the work of Islamic finance lawyers and the boards is firmly rooted in the Middle East. As a result Agha is adamant that the Middle East will continue to dominate the sector.
“Islamic finance is like a tree,” he maintains. “It needs the right soil to grow and flourish. The environment in the Gulf Cooperation Council [GCC] is particularly favourable to Islamic finance, naturally, as the prevailing law of the land is sharia. As such, the GCC and countries such as the United Arab Emirates, Saudi Arabia and Bahrain will continue to be leaders in this space.”