The Chairmen of Islamic finance industry bodies need to put aside their egos for a bigger cause

A Different Kind of Consolidation in Islamic Finance

By Rushdi Siddiqui Available at:

One of the most over-used words in Islamic finance is not standardization, scholars, regulations, etc., but ‘consolidation’. Islamic banks, Islamic leasing companies, Takaful companies need to consolidate to reach size and achieve scale.

As larger capitalized entities, they can better compete with not just the Islamic windows and subsidiaries of conventional banks and insurance companies (like HSBC or Prudential) but eventually the larger conventional financial institutions for mandates on project finance, M&A, buyouts, and so on.

Then again, what about consolidation amongst the Islamic industry bodies, the likes of AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions), IIRA (International Islamic Rating Agency), IIFM (International Islamic Financial Market), and CIBAFI (General Council for Islamic Banks & Financial Institutions)?

Consolidation would make sense when there is an overlap of founding shareholders, overlap of conference content, when same scholars sit on boards of the various bodies, when there are resource-constraints resulting in operational challenges and hiring qualified human assets, and so on.

Finally, consolidation would make sense when the need of the hour is an industry body that not only sees the bigger picture and where they fit in as an important stakeholder in Islamic finance versus the present ‘silo’ approach, but also speaks with one ‘heavy’ voice.

Founding Stakeholders

If we look at the sampling of the founding shareholders of the above-mentioned industry bodies, there is an overlap with heavy weights of Islamic finance including the Islamic Development Bank (IsDB), Al Rajhi, Albaraka, and Kuwait Finance House (KFH). The vision for Islamic finance at the time period of conception and launch of these industry bodies was from 1991 (AAOIFI) to 2005 (IIRA), and now times have moved on and the bodies need to do likewise in order to stay relevant.

The IIRA’s website states its corporate profile as:
The Islamic International Rating Agency (IIRA) is the sole rating agency established to provide capital markets and the banking sector in predominantly Islamic countries with a rating spectrum that encompasses the full array of capital instruments and specialty Islamic financial products, and to enhance the level of analytical expertise in those markets.
IIRA publishes professional analytical research for its multiple constituencies. The research will set a high standard for the market, enhancing the level of understanding of the value of fundamental analysis in assessing default or investment risk. Seminars will be used to teach this type of analysis outside the rating agency.

Today, IIRA does not have the history, size and reach to be able to compete with established rating agencies involved in Islamic finance, like Standard & Poor’s, Moody’s or Fitch. More importantly, is there any point in reinventing the rating ‘wheel,’ as the rating agencies understand quite well the various risks associated with Sukuk contracts, Islamic funds, Islamic banks, and so on?

IIRA may need to look into the process of Shariah adherence of Islamic banks, Takaful, leasing, iREITs, and even Islamic stock exchanges (like the DFM). The focus on process may result in addressing one of the important issues in Islamic finance, the non-compliant Shariah risk.

The International Islamic Financial Market (IIFM) website states its mission as:
IIFM is the global standardization body for the Islamic Capital & Money Market segment of the IFSI. Its primary focus lies in the standardization of Islamic financial products, documentation and related processes.
IIFM has done a commendable job on standardization of documentation in an inclusive manner with industry practitioners whilst working and/or partnering with established conventional institutions like ISDA. The question becomes would it be more sensible and efficient for IIFM to work under the umbrella of an industry setting-body that produces standards requiring standardization/adoption?

The message from the Chairman of General Council of Islamic Banks & Financial Institutions (CIBAFI) on its website states:
CIBAFI was established, then, for 2 major roles: support and protect the industry. Support the industry through awareness and training, holding conferences, seminars and forums and providing the necessary information. Protect the industry so as to avoid, as much as possible, the obstacles and deviations in the course of the Islamic finance industry.
Today, there are a number of more prominent institutions, universities and for-profit initiatives, offering Islamic finance certification courses, training, seminars, and conferences. There are many Islamic finance conferences, from Euromoney in London to IIFF in Dubai to KLIFF in Malaysia, that have pre and post conference workshops.

Would it not make more sense to bring CIBAFI under the umbrella of an industry body that produces standards that are followed by training, seminars, and work-shops on them?

Finally, the most prominent Islamic finance industry body in the GCC is AAOIFI, with 84 standards [(a) 44 Shari’ah standards, (b) 26 accounting, (c) 5 auditing, (d) 7 governance, including on Shari’ah compliance and supervision processes, and (e) 2 codes of ethics] and nearly 200 members from 40 countries. The mission of AAOIFI, as stated on its website:
AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari’a standards for Islamic financial institutions and the industry. Professional qualification programs (notably CIPA, the Shari’a Adviser and Auditor “CSAA”, and the corporate compliance program) are presented now by AAOIFI in its efforts to enhance the industry’s human resources base and governance structures.
Here the question becomes, why only a handful of jurisdiction have mandatorily adopted the AAOIFI standards, including Bahrain, DIFC, Jordan, Lebanon, Qatar, Sudan and Syria? Has AAOIFI lost focus from its core mandate on accounting, auditing, ethics, governance and Shariah standards for Islamic finance to areas, like, stock screening for Shariah compliant companies?

AAOIFI is best positioned to be the umbrella Islamic finance industry body in GCC as its standards become globally adopted documents (IIFM) with a process review (IIRA), and promoted and protected with that understanding (CIBAFI).

The combination then results in a four-by-four Olympic relay race, where much work is done together before the race, and, at the event, the baton is seamlessly passed from one body to the next. For example, it results in one Islamic finance conference event with all the four bodies under roof and taking place in the various Islamic finance hubs to educate, make aware, and demystify.

In looking forward, stage 2, assuming AAOIFI is tasked with ‘acquiring and integrating’ these Bahrain-based industry bodies, there needs to be discussions for a merger of equals with Malaysia-based IFSB (Islamic Financial Services Board).

The IFSB website states:
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors.
IFSB’s ‘prudential standards and guiding principles’ are targeted to the same stakeholders that AAOIFI ‘prepares accounting, auditing, governance, ethics and Shari’ah standards…’ for.

In stage 1, the Chairmen of these industry bodies need to put aside their egos for a bigger cause: promote and protect Islamic finance under one strong industry body.

Best Regards


Report card of Islamic indices

Report card of Islamic indices

By Rushdi Siddiqui Available at:

Islamic equity indices, 1.0, became a global ‘instrument’ in 1999, with the launch of the Dow Jones Islamic Market Index (DJIM). But, what progress, if any, has been made in the last 11 years on Islamic indexing? (Full disclosure: I was fortunate enough to lead a team for the DJIM.) But, first, a step back to better understand the function and role of indices.

The reason indices are important is because they are the DNA of investing, be it conventional, ethical or faith based. Trillions of dollars are managed/benchmarked to indices in the form of active funds, passive funds and exchange traded funds for the man on the street to funds to sovereign wealth funds.

Indices serve three major functions;
* provide a pulse of the health of the market place (in theory),

* are the basis of investable products and

* allow investors to know how their fund, portfolio , stock, etc, did against the benchmarks, be it DJIA, S&P 500, FTSE 100, Russell 2000, TR-IR Islamic Indices.

Pre-1999, Islamic funds were using social-ethical indices and major conventional benchmarks to measure performance against Islamic funds and portfolios. Obviously, it’s a challenge to compare a “pomegranate to an apple”, and the Islamic investor, much like their conventional counterpart, demanded their “own” performance benchmark.


The desire to have their “own” is the beginning of the delinking from the conventional finance. So, today we have thousands of Islamic indices from all six index providers, but only a handful are actually utilised as basis for products. Why?

Today, nearly 95 per cent of the Islamic funds are actively managed funds due to higher management fees, cynically speaking. The more important take-away is that it’s a start point of capital market parti-cipation to start balancing the bias towards a depositor only mentality.

Query: Would an Islamic fund index, that captures the alpha fund managers are trying to achieve, be a ripe offering for Islamic investors? Is this innovation?

Two important questions come to mind to understand progress in Islamic indexing:

* Have Islamic indices achieved the status of high profile indices after 11 years?

* Are companies vying to get into Islamic indices as part of their marketing plan?

Many of the largest companies in a global Islamic index are western/conventional companies.

About 85 per cent of market capi-talisation of a global Islamic index is in the (non-Muslim) G-20 countries, including names like Micro-Soft, Pfizer, ExxonMobil, hence, screening bias results in excessive exposure to three major economic sectors, technology, healthcare and energy. These sectors are not well represented in Organisation of Islamic Countries (OIC) stock exchanges, yet important part of a knowledge-based economy.

Thus, there is delinking from conventional indices, but Islamic indices, have a large bias towards compliant western headquartered companies and economic sectors not available or prominent in Muslim countries, hence, re-lin-king to western/conventional capi-tal markets, as exhibited by high correlation ratios to conventional counterpart indices,92 per cent to 98 per cent!

OIC Exchanges

So, what is the situation in Muslim countries with stock exchanges if we apply the international syariah screening standards of Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI)? Typically, the largest economic sector in most Muslim countries is the conventional financial sector, and many companies have small free float and illiquidity issues.

Thus, today’s syariah screening work well in the large and efficient G-10 markets, but not in the Muslim countries. The scholars need to look at the screening situation in OIC countries and, like converting a conventional bank into an Islamic bank, suggest ways and time frames to ‘Islamisise’ non-financial companies in Muslim countries to become compliant.

Additionally, because of automated screening of many of the index providers, many Islamic fi-nancial institutions, like Islamic banks, Takakful, Islamic leasing companies, etc, are sector screened out because classification deems them as “conventional financial” companies! Thus, the present methodology Islamic indices screen out syariah based or syariah by law companies!

(Full Disclosure: on June 27 in Kuala Lumpur, Thomson Reuters and IdealRatings, launched the world first research based Islamic indices following AAOIFI screening standards, TR-IR Islamic Indices, to address many of the concerns raised by fund managers and some scholars associated with automated syariah screening. The concerns go to credibility, especially if there are companies in an Islamic index that are not compliant, as usually associated with revenue streams breaching the 5 per cent threshold!)

High profile?

Thus, today, we have many Western companies in Islamic indices, but are they excited about being in such an index? These companies are neither vying to get into an Islamic index, nor promoting their inclusion in an Islamic index. Additionally, because there are very few Islamic index funds and ETFs, there is very little incentive to get into an Islamic index, as the assets under management for such funds is very small.

Second question is, how are Islamic indices covered in newspapers in Islamic finance hubs, like Malaysia, UAE, etc? The front pages of the business section of NST or GulfNews has previous day performance/closing of conventional indices, bond indices, currency rates, gold and oil prices, but no Islamic index performance! Yet, another reason for companies not to publicise as no publicity in an Islamic index!

Thus, in 11 years of Islamic indices in the public domain, we have:

* Thousands of Islamic indices but very few actually utilised for funds

* Mostly western/conventional screened companies in a global Islamic index, and neither have interest in being in an Islamic index nor promoting their inclusion

* Most of the funds are either in Malaysia or Saudi Arabia with bias towards actively management, and assets under management is small on average

* The print media may have daily stories about Islamic finance, but does not include Islamic indices where conventional indices are located

Surely, syariah-compliant screened companies from the western capital markets cannot be said to give a pulse of Islamic fi-nance as no major link to Islamic finance, except possibly selling their products and services to Muslim world. They may provide, at best, a pulse of fund flows, especially for global Islamic equity funds.

But, two important inter-related questions need to be raised and addressed:

• how to capture the pulse health of Islamic capital markets with equity indices indexes and

• how to build out the Islamic equity capital market to balance the present build out and bias to the Islamic debt capital market?


It must be emphatically stated that today’s syariah-screened indices are permissible and acceptable for all Islamic investors, be they Muslim or non-Muslims, even though there is a bias towards western “conventional” companies. Thus, today’s Islamic equity indices are very much like an Islamic window or subsidiary of a conventional bank holding company, both are scholar approved. But, is that enough?

To those important institutional entities, like pension funds in Muslim countries, that give out mandates for syariah-compliant investing, they need to dangle the “financial carrot” for more precise screening from committed index providers. Pension funds, with Islamic allocations, are the entrusted representative of less-informed Muslim investors, hence, they must be demanding on index providers for not only more thorough scree-ning but also purification.

The last 11 years raised the many issues in Islamic indexing. Now, looking forward, Islamic indexing in next 11 years, 2022, will have high-profile syariah-based indices, carried by many western media, have many passive funds off of it, and provide financial pulse of Islamic finance and Islamic equity capital markets, Inshaallah!

Best Regards
Dr. Zulkifli Hasan

Durham University Summer Congregation 2011. With Reader in Political Economy and Islamic Finance, Dr. Mehmet Asutay

My Publication: Shari”ah Governance Practices in Malaysia, GCC Countries and the UK


Dear My Weblog Readers,

I am happy to share with you my recent article published in the International Journal of Islamic and Middle Eastern Finance and Management. This article provides some interesting information and findings on the actual Shari’ah governance practices in three different jurisdictions.

For full article, click here: A survey of Shari’ah Governance Practices in Malaysia, GCC Countries and the UK

Enjoy reading!

Best Regards

Durham University Congregation 2011. With Emeritus Professor Rodney Wilson.

My New Contact Information


Dear my weblog readers,

Alhamdulillah, I am very delighted to inform you that I have successfully obtained my Ph.d and now back in Malaysia for good.

Any future correspondence, you may either contact me via e-mail or send a letter to the following address:-

Faculty of Shari’ah and Law
Islamic Science University of Malaysia
Bandar Baru Nilai
71800 Nilai
Negeri Sembilan

Many thanks for your supports and responses on every updates, issues and information posted in my weblog. I will continue this small endeavor and consider it as one of my humble contributions to the knowledge on the subject.

Best Regards

Durham University Summer Congregation 2011. With my best supporter, Mrs Hanani Harun.