One of the major reforms expected in the Islamic financial services sector in Dubai is a new, federal-level sharia board. Approved in May 2016 by the UAE Cabinet, the authorities believe that it will improve services and governance, and carve a path towards standardisation in what is a young and fast-developing industry. As of mid-2016 progress was being made towards this goal, with leaders from the Central Bank of the UAE (CBU), the UAE Federation of Banks, the Dubai Islamic Economy Development Centre (DIEDC) and others discussing alternatives.
On Board
Under the current market structure, Islamic financial services providers maintain sharia boards with at least three scholars and rely on them for fatwas (religious proclamations) to certify specific products and services as sharia-compliant. The scholars also ensure the compliance of the organisation overall and its public and regulatory disclosures. Institutions may also hire scholars on an ad hoc basis to evaluate specific products. “We are looking to improve the corporate governance of the sharia boards and committees for Islamic banks in the UAE,” the CBU’s assistant governor for banking supervision, Saeed Abdulla Al Hamis, told the press in August 2015. The role of a national sharia board would be to ensure that options available to consumers are consistent. This would be done by approving products suitable for use in the sector, giving consumers a consistent offering across institutions.
Taking on the job of approving products would also relieve some of the pressure on company-level sharia boards. In this scenario, the scholars and boards retained by companies would be responsible for all other sharia compliance activities. The authorities anticipate streamlined product offerings and improved governance, but individual financial institutions have long maintained their confidence in the current approach, in particular because it allows more freedom for product development and the chance to attract customers based on their own innovations. Another factor that is important to Dubai is the diversity of Muslims. The authorities are sensitive to this concern and aim to preserve an atmosphere that is friendly to innovation. “We have a large number of well-prepared scholars who can serve the industry, but the important thing is to create an infrastructure around them so that they can be creative and innovative within it,” Khalid Al Janahi, advisor to DIEDC, told OBG. Cost savings could offer one benefit, as scholars would no longer need to approve each product.
Though sharia compliance is central to the Islamic finance offering, it presents a challenge to institutions competing with secular competitors for that segment of the market, which may be unwilling to pay extra for a product that complies with their religion. This makes it difficult for sharia-compliant financial services providers to match the profitability of conventional competitors. According to an EY study, return on equity for Islamic banks are around one-fifth lower than that of their conventional counterparts in the same markets.
National Concern
Several important structural questions are still being decided about the new national sharia board, but its basic shape is coming into focus. One decision that needs to be made is to determine which federal agencies the board will report to. It could be placed under the CBU, or made independent from it and any other financial regulator. Another expected feature is the introduction of multidisciplinary experts to serve alongside traditional sharia scholars. Envisioned at 10 members, it will also be larger than the typical three-person board, and will also have experts in finance and economics. Adding experts with globally recognised credentials will help in the effort to position Dubai as the capital of the global Islamic economy, and establishing a set of standards for sharia-compliant activities of all varieties is a fundamental part of that effort.
Read More from OBG
