AAOIFI head criticizes the chairman of AAOIFI Shari’ah board; Islamic Development Bank launches work team to monitor credit crisis

The Islamic Development Bank is establishing a work team of experts to monitor the effect of the current financial crisis on the Islamic financial crisis. I think it is a good move and recognizes that, although the ethical requirements on the Islamic finance industry can help mitigate the effects, the industry is not completely unscathed from spill-over effects of the financial crisis. The spill-over flows through the conventional credit markets (many if not most sukuk are priced in connection with the LIBOR) and the effects of the crisis on the underlying global economy. While there is little that the work group can do to reduce the effects of the crisis on the Islamic finance industry, monitoring it closely can allow early moves to head off serious repercussions.

The head of AAOIFI, the global standard-setting body, lashed out at the head of the Shari’ah board, Sheikh Taqi Usmani, at the International Islamic Finance Forum for comments about the Shari’ah-compliance of sukuk that were followed by a drop in issuance in sukuk. Mohamad Nedal Alchaar said “The statements that were made by our sharia chairman about the sharia compliance of sukuk wrecked the market”. While the timing of the comments were inauspicious, there is little doubt that the financial crisis wracking credit markets worldwide had far more to do with the fall off in sukuk issuance. Sheikh Usmani’s comments, to be fair, were not followed quickly by a statement from the full AAOIFI Shari’ah board (that followed several months later). However, the comments in and of themselves, will probably benefit the industry in the long run by pushing the sukuk market, and hopefully Islamic finance in general, towards more differentiation with the conventional financial markets. Until now, most Islamic financial products have emerged from a process of ‘Islamicising’ of conventional products and have largely the same structure. What Sheikh Usmani was advocating (which was confirmed in the follow-on statement from the AAOIFI Shari’ah board) was removing fixed redemption of sukuk at maturity. This was instituted initially so that it resembled conventional bonds. Forcing instead on repurchase at market




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