There is a growing need for affordable yet authentic Islamic finance advice in the industry. In an ever-evolving Islamic finance system with more entrants to the market and technological developments, prices are indeed falling. Asim Anwar Kamal investigates further
Islamic finance is expected to continue its rapid growth despite the recent un- rest in the Middle East. New frontiers are currently being explored all over the world, from Europe through to the Far East. Governments facing political instability are turning to Islamic finance as a possible means for social & economic reform. In the West, Islamic finance has been viewed as a tool for the financial inclusion of the growing local Muslim populace. Furthermore for many countries Islamic finance is as a way to attract funds from the oil-rich GCC and Far East.
One of the requirements for any institution looking to enter the Islamic finance space is the establishment of a reputable Shari’a board on which tier 1 Shari’a scholars sit. Names such as Sheikh Nizam Yaqubi and Dr.Mohamed Elgari serve an important function in the overall marketing of the Islamic financial service on offer. Scholars such as these are no doubt knowledgeable enough to offer advice and thus their services come with a premium.
In the nascent stages of the Islamic finance industry, the high cost of Shari’a advice was attributed to demand and supply factors. This means that there were high levels of demand for Shari’a advice and very few well-versed Shari’a scholars on the supply side. It was expected that as the industry grew and matured, the supply of skilled Shari’a scholars would increase which in turn would cause a reduction in the Shari’a costs facing institutions.
Over a decade has passed and Shari’a costs continue to remain high even though the number of Shari’a scholars in the industry has increased. One of the reasons for this is that established financial institutions want established names and therefore the premium for their services has remained. For these established institutions paying this premium is justifiable as there is no doubt that tier 1 scholars deserve the fees they receive for their high-quality service.
However it cannot be denied that there is a growing need for affordable Shari’a advice for new players looking to enter the Islamic finance space, especially less established institutions. Many of these institutions, particularly in the west, are reluctant to take the plunge due to the high initial Shari’a cost and thus have decided to avoid Islamic finance or bide their time. Thus Shari’a cost has in-advertently served as a barrier to entry and has ultimately stopped the industry from growing even more than it could have.
“There is a growing need for affordable Shari’a advice for new players looking to enter the Islamic finance space. Many of these institutions, particularly in the west, are reluctant to take the plunge due to the high initial Shari’a cost and thus have decided to avoid Islamic finance.“
Notwithstanding this constraint, demand and clamour for cheaper Shari’a advice has been steadily increasing as seen by developments in the industry. For Fund managers looking to cut down on Shari’a costs, there are now software providers who for an annual or monthly subscription, pre-screen a universe of stocks and then allow fund managers to have access to the results enabling them to form a Shari’a-compliant portfolio. This saves the fund manager from having to hire external parties to conduct the
Shari’a screening on their behalf and thus reduces its costs.
Another way of saving on the Shari’a cost for some institutions offering Islamic financial services has been the appointment of a Shari’a advisory firm. These particular firms can substantially reduce Shari’a costs for an institution. Instead of the new player setting up their own Shari’a board, the firm can represent them and present the service to the end client’s Shari’a board. The reason that this is sometime more viable and efficient is that if for example an institution sets up their own Shari’a board for a particular service it is offering, whilst its own Shari’a board may approve the service, when they go to the end client to market it, the end client’s Shari’a board will also need to approve it and may even pass the service as Shari’a repugnant. In such a scenario the initial Shari’a cost of setting up the institutions Shari’ a board is a huge sunk cost.
Whilst the appointment of Shari’a advisory firms may save an institution some Shari’a cost, it is still a fairly costly option for a player who is still unsure about Islamic finance and is just dipping its toe in the water.
A recent initiative by Edbiz Consulting, a London-based firm, seems to be the way forward. For a nominal fee, small institutions looking at entering Islamic finance can have access to quality Shari’a advice on a daily basis. This would be appreciated by clients who need initial Shari’a advice with regards to an Islamic financial service they are looking into. This would be helpful for institutions looking at plain vanilla products that have become standard in the market such as commodity Murabaha for example. Instead of undergoing a high Shari’a cost the institution can have an informal opinion as to whether their proposed offering meets Shari’a standards such as AAOIFI’s and whether or not the service is likely to be approved by a Shari’a scholar.
Initiatives such as this would enable more institutions to have access to affordable Shari’a advice and this in turn would help the industry grow in future.
