| DUBAI, Sept 13
DUBAI, Sept 13 A group of Islamic scholars is
proposing a fresh solution to charges that banks' sharia boards
are open to conflicts of interest: create partnerships between
the boards and Muslim depositors, to insulate the boards from
pressure exerted by bank managements.
Sharia boards, composed of experts in Islamic financial law,
supervise Islamic banks' activities and products to make sure
they conform to religious principles, such as bans on interest
and pure monetary speculation.
Traditionally, banks appoint prestigious scholars to their
sharia boards and pay them handsome fees and retainers. This has
left the system vulnerable to charges of conflict of interest:
the scholars are being paid by the institutions which they are
supposed to be supervising impartially.
A group of scholars in South Africa, led by Durban-based
Ebrahim Desai, a senior figure in the city's Muslim community,
proposes that Muslim depositors in each bank fund a sharia
compliance body that would be created separately from the bank.
The body would then hire a sharia board to supervise the
bank. In this way, the scholars on the board would not be
appointed by or report to the bank's management, and would not
have a direct financial relationship with the bank.
"We seek a neutral and balanced position," Desai said by
telephone, adding that freed of subjection to bank managements,
sharia boards would be able to play more strategic and powerful
roles in governance.
"This would be in line with the larger interest of the
Muslim community in upholding sharia law by maintaining the
ultra-independence of the sharia supervisory board."
Emraan Vawda, a colleague of Desai, argued that by their
nature, banks were ill-suited to policing their own Islamic
activities. "Commercial concerns in the overwhelming majority of
Islamic banks far outweigh genuine commitment to Islamic values
and precepts," he said.
The proposal is likely to meet with considerable scepticism
in the Islamic finance industry. Desai said many institutions
had approached him to discuss his proposal but he declined to
name them, saying the talks needed to be kept confidential.
One potential issue is whether depositors would be willing
to fund the sharia compliance bodies; to compensate for this
expense, they might demand higher returns on their money placed
with the bank, which the bank might not be willing to provide.
Banks themselves might be reluctant to give authority over
their activities to a separate body, while highly paid Islamic
scholars might prefer to continue working for bank managements
rather than being subject to groups of depositors who could
prove more awkward and demanding.
One sharia board member in Dubai, who declined to be named
because of the sensitivity of the issue, said the scholars in
the South African group were not experienced in the financial
world and were instead mostly community-based.
Such scholars can command great influence within their
communities and give products informal endorsements to win mass
appeal, but they cannot necessarily rule on the finer points of
financial contracts, he said.
Desai and Vawda said they had served eight years on the
sharia board of South Africa's First National Bank (FNB), the
retail arm of South Africa's second-biggest bank FirstRand
, where they provided their services at no cost to FNB.
By avoiding financial remuneration, the scholars hoped their
decisions would be free of influence, and they rejected several
offers to be on FNB's payroll, Desai said. "We were not dictated
by money but dictated by principle."
However, working for free is unlikely to become a new model
for the mass of Islamic scholars, given the lucrative fees
available in the industry.
Desai, Vawda and the rest of FNB's sharia board resigned in
July, complaining that the bank had failed to consult with the
board on several occasions, and hired a new head of its Islamic
finance business without input from the board.
FNB said it aimed to appoint a new sharia board by the end
of this year and would draft clear rules and roles for the
board, which would not include approving appointments of senior
personnel. It said the previous head of its Islamic finance
business resigned after the bank conducted an investigation into
"internal processes and practices of the businesses aligned to
internal governance practice".
(Additional reporting by Xola Potelwa; Editing by Andrew