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De-mystifying the world of Shariah Compliance - talk with Yasser Dahlawi of Shariyah Review Bureau

Islamic Finance has been the fastest developing segment within the financial sector for a decade, what do you attribute to this exponential growth? There are several factors but in our view the development of regulatory policies has facilitated a level playing ground and engendered trust thereby helping boost the growth of the segment.

Additionally, the spread of IFI’s has also helped grow the sector as conventional institutions are only able to pitch to these large IFI’s if their products/funds are Sharia compliant. IFI’s in the GCC and Asian countries demand that product offerings are Sharia compliant because they need to show that their polices and investments are aligned to their corporate articles of practicing compliance in all affairs with Sharia principles. Lastly, our experience shows that many Islamic investors around the world in particular family offices demand that the funds they invest in are certified and supervised on an ongoing basis with Sharia principles and rulings.

What kind of certification does a company need to be able to say their product or service is Shariah compliant?

A certificate is just one element of the Sharia governance system which integrates with wider corporate reporting and adds more reliability to reported performance by providing assurance that the Sharia processes and Sharia controls are actually in place and operating effectively at the institution making the Islamic product offering. This system, apart from providing stakeholders comfort that Sharia compliance reporting is reliable and presents a fair picture, the shareholders also get confidence in actions taken by the management of the funds to reduce exposure to Sharia non-compliance. The Sharia governance system (in countries like Bahrain, UAE, Oman, Pakistan, Malaysia etc) typically includes a Sharia Board, an internal Sharia audit function, an in-house Sharia compliance officer and an independent external Sharia audit. However, in countries where there is no regulation for governing Sharia compliant products the bare minimum requirement is to assign a Sharia Board or a Sharia advisory firm to review the documents of the product or fund and (once everything is congruent to Sharia principles) have it certified. After the certification an annual Sharia audit must be conducted by the Sharia Board or the Sharia advisory firm on the executed transactions. Please note that Sharia certification alone does not provide ongoing assurance to Islamic investors, and this is why the annual Sharia audit is required by Islamic investors.

How can international companies go about receiving this certification and what is the process of evaluation?

Any international company (no matter where their offering or where they operate) can approach us to have their product or fund reviewed (and if compliant to Sharia principles) it will be certified. Our process generally includes:

  • Prior to entering an engagement, we understand the client’s investment objectives, focus and critical factors in light of established Sharia guidelines. Here, we review the structure and process flow of the offering to ensure that it is conceptually compatible to the principles of Sharia.

  • Then, based on regulatory mandates or client specific requirements we evaluate the Sharia governance (number of scholars, cycles of Sharia audit etc) and protocols and issue a proposal.

  • Conduct Sharia review to identify, examine and assess the documentation and related contractual instruments that exist within pertinent offerings and across the key Product, Fund, or Investment components.

  • Hold calls with the client to explain the Sharia risks in the offerings and offer solutions to align with Sharia principles. Once all requirements have been implemented, we issue the Sharia certificate.

  • Provide ongoing Sharia advice and consultation for any changes to the product post certification including answering queries of both the product management and the investors.

  • After a period of 12 months (or on a quarterly basis, as the case may be) develop a Sharia audit plan line with the approved guideline of the Sharia certificate. Identify and document Sharia risks specific to the offering and investment scope. Develop comprehensive Sharia program that will form the basis of the testing procedures to be undertaken for the Sharia audit.

  • Identify, substantiate and agree with management observations, SSB recommendations, agreed management action plan, periodical screening comments and timeframe to implement action plan.

  • Issue the Sharia audit report.

As the international investor community begins to demand ESG or more broadly ‘sustainability consideration’ in their portfolios, how do you think this will affect the requirement for a new wave of shariah compliance? And do you see a natural alignment between shariah compliant projects and sustainability?

We do not see any issues in integrating Sharia compliance with ESG criteria as sustainable requirements and relevant disclosures can be deployed on top of the requirements of Sharia criteria thereby making the product both Sharia compliant and compatible to ESG criteria. With regards to alignment between ESG and Sharia compliance, our experience in helping investments attain Sharia compliance has shown that the principles expressed in the Quran, Prophet Muhammad's (pbuh) teachings (Sunnah) and Islamic legislation codified by major schools of jurisprudence has commonalities with sustainable investments in some cases, while in other cases it will go beyond many of the ideas that have formed the basis of socially responsible investments. We do have notable differences as well for example our focus on not allowing investments to participate in activities that are socially detriment and are prohibited such as prohibition of interest based transactions and its replacement with a system which is based on shared risks, profits and losses. Other activities that are excluded include gambling, pornography, the manufacturing and distribution of alcohol and pork.

An interesting area for us is the environmental ethics whose criteria we share with SRI, and we see this of profound importance and feel that it must be incorporated into contemporary Islamic financial practices. Studies show us that jurists have identified conservation of the natural environment as one of the “higher objectives” of the Sharia.

Our ethical guidelines teach us that the Prophet (pbuh) forbade the killing of bees, and livestock and setting of fire to anthills. He once ordered a man who had taken away the nestlings of a bird from their nest to return them to their nest. He also forbade the cutting down of trees. We learn from one his hadiths that “Anyone who plants a tree or sows a field and a human, bird or animal eats from it, it shall be counted as charity from him.”

Additionally, the great Maliki jurist al-Qurṭubi has said that greening the earth and planting of trees is a collective obligation of a community. And in the event of total neglect of such a duty, the ruling authorities have the right to have people do it.

Another commendable effort worth mentioning here is the Fatwa on the conservation of biodiversity issued by the Indonesian scholars. According to the fatwa “every living organism has the right to sustain its life and may be used for human well-being. Hence treating endangered species well by protecting and conserving them is mandatory.” The USAID Biodiversity Handbook (2015) acknowledged and appreciated this fatwa towards animal protection.

The evolvement of Fintech has democratised access to services and often creates a more inclusive society. How does the Shariyah Review Bureau enable fintech platforms to give piece of mind to their potential consumers?

Firstly, we’ve developed our services in way that helps fintech companies control and save on their Sharia compliance costs.

Secondly, our consultation service allows these firms to team up with our in-house Sharia advisors and scholars to create their own Sharia compliant structures with unlimited consultation. This interactive consultation, lets these firms discuss ideas, walk around structures from any perspective, and explore competitive instruments with pragmatic solutions.

You have supported the Shariah compliance journey of many international companies since 2013, what kind of products or services from non-Islamic markets do you see as being the most successful in Islamic countries?

In our experience it is the Sharia compliant Real estate funds followed by Islamic Private equity funds.

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