Shariah Governance Islamic Finance PDF

Practitioners Article
137
ISRA International Journal of Islamic Finance Vol. 5 Issue 1 2013
* Sayd Farook is Global Head of Islamic Capital Markets, Thomson Reuters, Kingdom
of Bahrain. He can be contacted at sayd.farook@thomsonreuters.com.
** Mohammad Omar Farooq is Head of Center for Islamic Finance, Bahrain Institute of
Banking and Finance, Kingdom of Bahrain. He can be contacted at mfarooq@bibf.
com.
SHARAH GOVERNANCE,
EXPERTISE AND PROFESSION:
EDUCATIONAL CHALLENGES IN
ISLAMIC FINANCE
Sayd Farook* and Mohammad Omar Farooq**
Abstract
The shortage of qualified Sharah practitioners (scholars) is a major
challenge facing the Islamic finance industry, which relies on the
high concentration of a few top scholars/practitioners for Sharah
compliance assurance. A good number of the top practitioners have
risen to prominence in the absence of any recognized standard or
requirement for this profession. Their qualification and training
which equip them with the necessary skills to be effective in dealing
with the complexities and linkages in a modern economy and
financial system is an important area of concern. These challenges
can be addressed in the long-run by taking a number of steps: (a)
establishing educational and training institutions with relevant
programmes; (b) designing curriculum and setting standards for
qualifying Sharah practitioners as a professional pool to serve the
industry; and (c) forming a professional body to recognise and certify
Sharah practitioners just as is done in any modern professional
discipline. This conceptual paper examines the pertinent issues and
delineates a brief outline of a qualification framework to initiate the
relevant discourse.
Keywords: Islamic finance; Sharah governance; Sharah
supervision; Sharah scholars; Doctoral system.
Sharah Governance, Expertise and Profession: Educational Challenges in Islamic Finance
138
I. INTRODUCTION
A frequently discussed issue in the Islamic finance industry is the
shortage of Sharah scholars and the need for a global infrastructure
to fill this gap within the framework of some recognized standards
(Greuning and Iqbal, 2008; Hamzah, 2010). Despite pronounced
resistance from some senior scholars, the recent initiative by the
Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) to set a new standard for Sharah scholars
underscores the concern (The Peninsula, 2010; El Baltaji, 2010; El
Baltaji and Anwar, 2010; New Horizon, 2011).
This is indeed a formidable challenge, but experience with the
industry gives us new insight on how the required human resources and
talents can be developed within the presently available infrastructure.
Currently, the global financial system is gradually embracing
Islamic finance as one of its definitive segments. While there are
many institutions, including international organisations, such as
Thomson Reuters, Deloitte Touche, Moodys and Bloomberg, that
are recognising the importance of this segment and mobilising more
resources to support Islamic finance initiatives, the privilege of
Islamic finance extends only to the communities that can afford its
high Sharah-compliance premium (Shufelt, 2010). It is widely
recognized that there are hurdles other than affordability and cost
that remain significant bottlenecks for the industrys growth. These
include lack of wider and cheaper distribution channels, standardised
products and higher volumes and liquidity. In addition, the credibility
of Islamic finance continues to be a problem with the common
Muslims, especially due to scepticism regarding the core Sharah-
compliance process (El Gamal, 2005; Remo-Listana, 2009; Ahmed,
2010; Muto, 2010).
For Islamic finance to move to the mainstream and really serve
the man on the street, it must resolve, among other matters, issues
of efficiency and credibility associated with the Sharah-compliance
standards and process, which threaten to place the entire Islamic
finance industry at risk. The potential downside, if the industry and
its gatekeepers, the Sharah scholars, do not resolve these challenges,
is significant. One negative repercussion would be regulatory capture
and the other would be loss of legitimacy in the eyes of its primary
customers: the Muslims.
As Sharah governance is at the core of Islamic finance, a
related and pivotal challenge is the education and training of Sharah
Sayd Farook and Mohammad Omar Farooq
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scholars
11
in the context of the complexity, dynamism and inter-
relatedness of our contemporary world, so that the qualifications are
duly standardized. This paper specifically discusses this challenge
facing the Islamic finance industry and looks into possible long-term
solutions to address the issue of the qualification and training of
Sharah scholars.
II. SOME PERTINENT DIMENSIONS OF THE CHALLENGE
Before dealing with the issues pertaining to the Sharah scholars,
particularly their qualifications and ideas about setting standards,
the following highlights a few pertinent dimensions of the challenge
facing the industry.
A. Costs
The Sharah diligence process is the most important and distinctive
aspect of Islamic finance and the additional costs (inefficiency taxes)
borne by all the market participants constitute a significant and
consistent challenge. Consider the case of a hypothetical ukk. The
additional cost for the issuer ranges anywhere between a quarter of a
million to a million US dollars. This includes the costs for the Sharah
1 It is important to clarify at the outset that the term Sharah scholars can be a
misnomer, as it relates to a niche field of specialized professional expertise, rather
than the general sense of lim (scholar and expert). As explained in Standard 10
(2009) of the Islamic Financial Services Board (IFSB): Another term that has been
commonly used within the IFSI [Islamic financial services industry] is Shariah
scholars, which refers to persons who are engaged professionally by IIFS [Institutions
offering Islamic financial services] to provide expertise in the Shariah compliance
process. While the word scholar has been preferred as a direct translation for
alim (plural: ulama), which connotes a person who is learned and expert, in the
context of the IFSI we are actually referring to a more specialised level within Fiqh
al-Muamalat (Islamic commercial laws) rather than Shariah more widely or other
areas of Islamic studies. Furthermore, that specialisation is dedicated towards
providing expert opinions in the form of Shariah pronouncements/resolutions
related specifically to Islamic financial services and usually not directly to the
general public or businesses more widely. Therefore, again in the interests of clarity,
it is important to stress the professional (as opposed to an academic) connotation
associated with this role. Hence, this document adopts the term members of the
Shariah board, rather than Shariah scholars, to refer to ulama or others who
provide their professional services specifically within the IFSI.
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advisory, structuring and the additional legal documentation cycles.
2

Documentation alone generally can cost in six figures regardless of
the size of the issuance, as described by Remo-Listana (2010):
Because of the relative infancy of the product, ukk
documentation is often highly negotiated and based on
no existing template, making the process costlier than
conventional bonds and other securities. Documentation
cost tends to be fixed at $100,000-250,000 per issuance, a
negligible cost if the issue is sizeable.Standard & Poors
(S&P) confirms that the costs of structuring and issuing
ukk remain high relative to conventional bank loans and
bond issuance. Legal and accounting fees contribute to this
higher cost structure, as does uncertainty regarding the
perceived risk associated with these instruments.
According to a report by Trowers and Hamlins (n.d.), the cost of
issuing ukk can be as much as 60% higher than conventional bonds.
In 2009 S&P warned that the relatively high cost of structuring and
issuing ukk could have a negative impact on the growth of the ukk
market (Arnold, 2009).
Similarly, these issues extend to everything from corporate finance
products to structured products. There are two obvious solutions:
distribute the costs over a wider number of transactions (economies
of scale) or reduce the quantum of the costs (through reduction in
fees per transaction). The former can be induced via standardisation
and minimizing the role of Sharah scholars serving on individual
boards or advising on a specific offering. Unfortunately, while there
is movement in the direction of standardisation, its pace and extent
still remain weak.
B. Conflict of Interest
The challenge of scholars being appointed by management and/or
shareholders of Islamic banks/financial institutions/funds and thereby
being paid by them represents a serious, yet presently irresolvable
conflict of interest in the eyes of the modern corporate governance
observers. Add to this the fact that some scholars now get paid in
terms of basis points per fund managed (albeit to assist smaller fund
2 It is noted that Malaysia as a leader in the field of Islamic finance is trying to address
the relatively higher costs of ukk issuance

(See, Aziz, 2007).
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managers); a value-free compliance expert would suggest that this is
a serious conflict of interest between their duty to maintain perceived
and actual independence and their own need to get paid for their
services.
Some countries have resolved this issue to a certain extent
with the announcement of a Central Sharah Committee, which
has to approve all products in the jurisdiction, in addition to having
institution-specific boards. This issue has led Pakistan to require an
Islamic financial institution (IFI) to have only one Sharah scholar,
and that scholar is barred from serving any other institution. Like
many others in the industry, AAOIFIs former Secretary General Dr.
Nedal Alchaar has publicly noted this concern: Theres a potential
case for conflict of interest, and a case of information leakage or
perhaps competition impact (El Baltaji and Anwar, 2010).

Other
methods to resolve this would be if the board was selected/allocated
impartially and paid by the central Sharah committee established
by a centralised body such as the central bank or securities regulator.
However, as with the previous central Sharah committee initiative,
these recommendations are fraught with quasi-government/regulator
intervention, bodies which may or may not have the foresight or will
to implement such bold regulations. Of course, it is important to note
that emphasis on self-regulation should receive the primary emphasis,
but while regulation is not always the solution, there are meritorious
contexts for regulatory intervention, especially at the early stage of
the evolution of an industry.
The very same issue of conflict of interest related to concentration
of a few scholars is related to the lack of standards in qualifying
Sharah practitioners, as a number of scholars have risen to
prominence without going through any substantive standards of
scrutiny, while new entrants in the niche area of Sharah expertise,
who might have meaningful education and training, find themselves
marginalized by the industry. Establishing standards of qualification
can lessen the problem in this regard.
C. Multiple Board Representation
The network analysis research of Funds@work (2010) provided the
best visual representation of one of the most serious challenges the
industry is facing: the multiple conflicts of interest.
With the top 50 scholars being involved in the boards of more
than 73 percent of IFIs (holding 834 positions), it is evident that there
is serious concentration risk in the most critical function of Sharah
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compliance certification (Wright, 2006). This concentration also has
cost implications. The cost of Sharah due diligence to the industry, as
discussed earlier in this paper, is in good part the income of those who
provide Sharah scholarship and expertise to the industry. According
to some reports, top scholars earn an astronomical income on a per
project basis. Scholars can earn up to $150,000 per project and it
can take four to six months for a Sharah-compliant project to be
developed. For the scholar, that can mean between four to six weeks
of work on a project (Reuters Summit Notebook, 2010). While there
is a demand for disclosure of compensations to the Sharah scholars,
only some scholars agree while many others are very sensitive about
it. Wright (2006) states:
Some feel that shariah costs ought to be disclosed by banks,
as they are for board directors. This proposal divides opinion,
even among the most apparently like-minded of scholars:
when Asiamoney puts the suggestion to Dr Elgari and Shaikh
Nizam Yaquby, the two most well-known scholars in the Gulf,
Elgari agrees (The only reason they are not doing it now is
maybe theyre ashamed: this is the amount we are paying our
scholars) and Yaquby reacts angrily.
The anecdotal information that is available in public gives some idea
that compensation to the scholars is a big chunk of the Sharah-
compliance process. Wright (2006) elaborates:
[T]he most prominent scholar in Dubai made waves recently
when he suggested that US$300,000 was not an unusual fee
for advice on a complex transaction. Others suggest that the
retainer for an international bank would be in the region of
US$150,000 to $250,000, and one source says he was quoted
US$100,000 just to get Shariah approval on a fund, after all
the product development had taken place.
Such concentration-cost relationship casts a long shadow over the
efficiency of the Sharah compliance process and raises question
whether such high cost of Sharah compliance is due to the relevant
cost of service or due to the concentration. Yet, some may argue that
there are economies to having Sharah scholars serve on multiple
boards as they can take their experience (not the institutions intellectual
property) and apply cutting-edge thinking across institutions. This
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reduces the time (and therefore costs) it usually involves to move
through the Sharah diligence process, particularly for sophisticated
products involving contemporary financial terminology and several
conjoint documents. The industry professionals who work closely
with the Sharah boards almost consistently report that much of
the preparation and review work is done by individuals at a lower
level, and the members of the Sharah Board more often than not
do not review the documents in detail. Rather, they either focus on
the summary or the presentation of those who have designed the
products and/or prepared the documents. If that is the case, then the
exorbitantly high premium charged by the Sharah scholars can
be reduced significantly by setting standards for qualification and
making it a more level playing field for the younger Sharah experts.
It has been argued by some of these senior scholars that having
Sharah scholars on multiple boards also aids in the process towards
uniformity and standardisation as these scholars will apply uniform
principles and structures (where requested) to several institutions.
However, the flipside is significantly dangerous for the industry.
With Sharah scholars spread over several Sharah boards (some sit
on as many as 80 boards), the situation is increasingly burdensome
for a rapidly aging group of Sharah scholars, some of whom are
well beyond retirement age. The argument is further weakened by
the fact that generally top Sharah scholars are not involved at all in
training and thus do not serve as a bridge to transfer their accumulated
knowledge and experience to the successor generation.
This state of affairs, besides contributing to a rapid decline in
the accumulated knowledge in the industry, could have serious cost
repurcussions for the industry as it tries to cope with an even smaller
group of recognised Sharah scholars, whose time will require an
ever increasing premium to make up for the wider shortage of talent.

D. Sharah Diligence
Further, it is highly unlikely that such thinly stretched Sharah
scholars are able to provide the appropriate level of Sharah diligence
to every piece of documentation. Rather, they will look at the structure
outline and leave the thorough due diligence to their deputies. It is
difficult to assume that all points of Sharah compliance would be
covered in depth for a ukk-offering memorandum (they average
around 150 pages). This becomes even more difficult when it comes
to funds and structured products. Some may argue that, like lawyers
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and custodians, Sharah scholars also get accustomed to the standard
terms and conditions and this may result in quicker processing time.
Nevertheless, it does not necessarily imply that there is an appropriate
standard of due diligence on each piece of relevant documentation.
The above-mentioned dimensions of the challenge should make
the stakeholders of the industry think about the potential consequences
of the existing concentration of top Sharah scholars serving the
industry and the relevance of setting meaningful standards of
qualification and preparing the successor generation of scholars and
experts, which will also open up opportunities for younger entrants
desiring to serve the industry.
III. PROPOSALS ON SHARAH SCHOLARSHIP
During the initial phase of the industry, the issue of Sharah
scholarship was more challenging as there was hardly any scholar
with experience or expertise in this field, as Archer et. al. (2007)
explain:
In those early days, there were few scholars with knowledge
of finance and banking. The handful of scholars that
had published on related subjects were without practical
experience, having had no exposure whatsoever to modern
banks and financial markets. In many cases, banks retained
scholars based solely on their reputation as authors and
authorities on Islamic subjects in general; not as experts or
authors of works on finance or related subjects.
Thus, most of the senior scholars in high demand also rose to the
top not through any formal and systematic process of education,
research and gaining of experience. Instead, they became practicing
scholars/experts through participation in the industry and learning by
doing. There was simply no alternative during that phase. However,
it is highly desirableand some would argue imperativethat the
qualification and preparation of scholars to better serve the industry
should be scrutinized so that the future generation of scholars and
experts can be reared and prepared more systematically. This has
become even more important, if Sharah supervision should involve,
as Timm (2007) states, highly qualified and recognised scholars
with vast experience and knowledge concerning modern dealings and
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transactions in financial matters as well as the macro-environment
in which such financial activities take place.
3
Given the knowledge of the gatekeepers of Islamic finance and the
challenges of the Sharah compliance process, how can the industry
resolve these issues? The idea of creating a supranational Sharah
association would not be feasible, given the level of discomfort
that unification and cooperation present in any jurisdiction related
to Islamic finance. The other solution pertains to certifying newer
generations of would-be-scholars to ease the supply-side barriers to
growth.
In response to this supply-side challenge, AAOIFI has
commendably established the Certified Sharah Advisor and Auditor
(CSAA) program. A challenge with this program is that it does
not really qualify scholars to create new opinions; rather, it allows
successful candidates to apply existing standards to their professions
as Sharah advisors or auditors. Furthermore, the current CSAA
program merely provides training equivalent to exam preparation
without ensuring any meaningful trainingespecially, experience-
basedto the certificate recipients. In addition, many of these
CSAA qualified individuals already have experience and are getting
the certificate for recognition. Thus, instead of contributing toward
enhancing Sharah scholarship, the programme is limited to training
the community of practitioners and even that at a rather average level.
It is also not meant to provide training to new individuals to equip
them with preparation that will enable them to take up the mantle as
the successor generation of scholars and experts.
Thus, a more structured and systematic approach to the education
and training of the Sharah scholars is needed. In this regard, one
possibility is introducing a doctorate system (or advanced graduate/
postgraduate education) and requiring potential and interested
scholars to go through it. With relevant adaptation in light of the
legacy of Islamic scholarship and the contemporary needs, this may
provide a highly suitable and effective form of educational discipline
and rigour to qualify an individual to be universally recognised as a
Sharah scholar or a scholar in any other field. The doctorate system
is not indigenous to the Islamic scholarly tradition of recognition by
3 According to El Tiby (2011: 78), among three main reasons why the Capital market
in the Islamic Financial System has developed at a slower pace compared to the
overall banking system[is] the lack of clear Shariah guidance in this area and the
lack of Shariah scholars with a strong and solid financial background.
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peers. Regardless, it is the most widely established and recognised
form of scholarly achievement that is presently available, and it is
not surprising that many if not all the existing Sharah scholars have
already gone through it, though their education was not necessarily to
specifically prepare them for Islamic finance.
Indeed, the concept of a higher doctorate found in some European
countries (and we would argue even the doctorate itself) presents a
similar parallel to the peer recognition process informally adopted
to recognise Sharah scholars. The higher tier of doctorate requires
the submission of a portfolio of published research of a very high
standard, much like how some Islamic scholars are recognised by
other established scholars for their advanced application of Sharah
concepts to contemporary challenges. Similarly, even the doctorate
system, as employed by most universities in the world now, requires
the candidate to prove his level of knowledge in a certain field by
undertaking peer-examined research, which is also expected to be
sustained during ones scholarly career. Further, the system most
closely replicates mentored learning as the student relies on the
supervisor, an established scholar, to transfer his knowledge within
a structured framework.
To understand and appreciate the fact that not only is there no
inherent problem with the doctoral educational system from the
Islamic perspective, but also that this structure of education is of
great merit, having evolved from accumulated human experience, it
is important to examine the system in its essence.
Modern higher education, especially at the doctoral (PhD) level
is now so pervasive that ... the effects of doctoral education ripple
out across nations and generations (Walker, 2008: 2). Why has it
become the modern standard? It has become an imperative, and in the
contemporary developed societies both the public and private sector
allocate so many resources to it, because: Graduate education has
played an important role in developing the human capacity necessary
to lead the increasingly technological and knowledge-centered
economies of the last and present centuries. (Altbach, 2006: 65).
In this globally competitive world, it is not enough to just have a
traditional education that is neither effectively anchored in its own
Islamic legacy nor has the confidence and adherence of its own people
because of its disconnect from the real world (Stanton, 1990; Meijer,
2009). Beyond just the scholars and experts needed for the field of
Islamic finance, the educational system in general needs a thorough
overhaul that can transform its peoples capacity to acquire, process
and apply knowledge in light of the positive pursuits as indicated in
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the Quran and the Prophetic legacy. Once we are able to cut through
the parochial maze, it should not be difficult to discern, appreciate
and acknowledge how modern educational methodology has earned
its dominance and is just as relevant to the Muslims as to everyone
else.
This requires understanding the nature of the doctoral educational
system. As Walker (2008: 3) explains: ... doctoral education is, by
its nature, in the business of asking hard questions, pushing frontiers,
and solving problems ... The great civilization of Islam that now
has become the golden past was built on the same underlying
spirit. Indeed, the empirical attitude and inductive methodology were
instrumental in this context and it was precisely in Islam that
originated the spirit and method of the empirical attitude and inductive
inquiry, which he [the late Allamah Muhammad Iqbal] regarded as
the key to conscious systematic progress (Hodgson, 1974: 349).
Gradually, Islamic civilization declined, not just in political power
and authority, but the pursuit of knowledge and inquiry became
fundamentally restricted to theology, jurisprudence and sufism. The
historical fact remains that our scholarsexperts, scientists, jurists,
philosophers, theologians, historiansembraced mind-building as
part of the Prophetic legacy, and as part of their respective fields,
they raised and dealt with hard questions they encountered. They
pushed virtually every possible frontier of their time and, often in
an applied manner, many of them sought and discovered solutions
to problems (Farooq, 2000). The expectation from our present and
future generation of scholars, whether in the field of fiqh, finance,
education or science, is no less.
The purpose and philosophy of doctoral education have been
identified in many different ways. As Thomas and Brubaker (2000: 1)
explain:
Traditionally in academia, the two main purposes of
masters-degree and doctoral projects are (a) to provide
graduate students guided practice in conducting and
presenting research and (b) to make a contribution to the
worlds fund of knowledge or to improve the conduct of some
activity. The practice aspect...aim[s] to equip students to do
research and writing of respectable, publishable quality in
the future. The contribution-to-knowledge aspect is intended
to make the students study more than just a learning exercise
by using this opportunity to produce valued information or to
introduce a point of view not available before.
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However, the way Golde and Walker (2006) articulated the primary
purpose of doctoral education better resonates with the Islamic
ethos, as it is also consistent with the legacy of Islamic scholarship
throughout history:
The development of students as stewards of the discipline
should be the purpose of doctoral education. A steward is a
scholar in the fullest sense of the termsomeone who can
imaginatively generate new knowledge, critically conserve
valuable and useful ideas, and responsibly transform those
understandings through writing, teaching, and application.
Stewardship also has an ethical and moral dimension; it is
a role that transcends a collection of accomplishments and
skills. A steward is someone to whom the vigor, quality, and
integrity of the field can be entrusted. The most important
period of a stewards formation occurs during formal
doctoral education.
From this perspective, this is precisely the way the existing generation
of Islamic scholars/experts and the relevant stakeholders should
be approaching this issue and challenge, because scholars/experts
of each generation must contribute toward (a) knowledge creation,
and (b) education and training of the next generation of scholars and
practitioners so that their trainees and students become the stewards
of the discipline. It is very much a trust (amnah) that needs to be
acknowledged and appreciated both individually and collectively by
our scholars. Indeed, even though the term doctorate is generally
traced to the Latin docere, which means to teach, Makdisi (1970,
1981) put forward a controversial hypothesis (rejected by Huff, 2003)
that the doctorate has its origins in the Islamic Ijazah.
Whether Makdisis hypothesis is valid or not, in many respects,
there are commonalities between a doctoral award and the process
of recognition for our scholars throughout history. An important
difference, however, is that the former system relies on an established
set of guidelines, documented and nearly universal globally, while
the other relies on an informal and largely unstructured process
to certify the next generation. Building a bridge between the two
systems would greatly enhance the transparency and lend a form of
credibility to Islamic fields related to revealed knowledge.
At the core of the doctoral system is research, which is meant
to result in something substantive and meaningful being added to
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the current body of accumulated knowledge, whether the research
is analytical/theoretical or experimental/empirical. Indeed, the main
purpose of a doctoral dissertation is to provide an advanced and trained
seeker of knowledge an opportunity to seek something new in the area
of inquiry and thus nudge the frontier of knowledge a little bit. Before
solutions are provided, problems should be identified and studied in
depth, which is precisely the purpose of research. Unfortunately,
the traditional educational preparation in religious establishments
lacks any structured and systematic approach to integrate research
into their curriculum. This is further complicated by the fact that the
established religious traditions tend to think that, broadly speaking,
all the fundamental or important issues or aspects have already been
identified and therefore what is needed is adherence and application
of the accumulated body of knowledge without taking any fresh
approach or exploring fresh perspectives.
However, the demand of modern times has been to some extent
taken into account by those serving the Islamic finance industry.
Many Sharah scholars in the industry already have doctoral (PhD)
degrees, and this is especially true for younger scholars entering the
field (Kettell, 2010). However, as the industry matures, while this
should be standard requirement, it is also an imperative to have well
designed doctoral curriculums for scholars and experts that may
provide the breadth of knowledge and expertise drawn on the range
of disciplines relevant to serving the financial sector and enabling
them to develop a relevant research background. Notably, this is an
issue not just in the case of the education and training of scholars
and experts serving the Islamic finance industry, but also traditional
Islamic scholarship in general (See, Farooq, 2011). As an example,
while Islamic finance is often presented as a better means to address
the problem of poverty and underdevelopment, Islamic scholars have
hardly done any analytical, let alone empirical, work on the nature
and extent of the challenge of poverty and its persistence (Farooq,
2009).
As the Islamic finance industry is growing, everyone recognizes
the importance of bringing maqid al-Sharah (broader objectives
of Islam) into the core of the industrys activities. What are the main
problems concerning this matter? One of the pioneering Islamic
economists, Dr. Muhammad Nejatullah Siddiqi (2006) clarifies the
role of the Sharah scholars/experts in this regard:
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Shariah experts do care for maqasid al-Shariah. As I have
argued elsewhere, there are numerous recent examples of
fatawa given on the basis of maqasid. The problem in my
opinion is not of willingness to take maqasid into account.
The challenge comes from the nature of the task in the new
environment. These are tasks calling for not only economic
analysis but drawing upon latest developments in other
social sciences like sociology, psychology, political science
and management. Lacking proper institutional arrangements
for training to do the task, with its necessary backup in terms
of fundamental research, instances of malfunction have been
increasing in recent years, causing anxieties in the market
and raising the possibility of a backlash in terms of consumer
rejection.
Thus, to meet the challenge of the time, education for Sharah scholars
needs revamping, which is not possible through the traditional system
or curriculum. Even the modern institutions for higher Islamic learning
that are making some positive difference may need a transformation
(Hashim, 2007). Of course, this cannot be accomplished through
obtaining degrees from Western-type universities that may not have
the relevant curriculum, focus or specialisation to guide the relevant
training and education.
While identifying the doctoral system as a potential framework
for qualifying the Sharah scholars, it should be clearly underscored
that the doctoral system in higher education is by no means without
limitations or criticisms (e.g. Bill, 1996; Wilfred, 2001). Indeed,
in some areas of modern science, especially the social sciences,
entrenched orthodoxy has developed. Economics is a case in point.
Modern economics has built its scientific foundation on formal,
mathematically complex and elegant models that happen to be based
on assumptions clothed in the trappings of rigor and prestige, and yet
so far removed from reality that after every major crisis the leading
economists have to scratch their heads. In the case of the current on-
going global economic/financial crisis, none other than the late Nobel
Laureate Paul Samuelson humbly confessed: What we know about
the global financial crisis is that we dont know very much. (Kontan,
2008 cited in Lucas Setia, 2011). While Samuelsons candor is highly
admirable, one cannot escape from the fact that underlying this we
dont know very much is a world-class PhD education, and the
statement applies to some of the most notable economists who have
shaped the contemporary world of economics.
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A PhD education in itself may not be a panacea for anything. In this
particular context of Islamic finance, what is important is to build
a system of higher education that combines advanced education,
research and a peer-evaluation mechanism that earns confidence in a
specialized field/profession and is beneficial in being able to address
real world problems. An important premise of Islamic finance is
its real-economy orientation. Unfortunately, the reality is that the
emphasis on the real economy has found its revered place only in books
and rhetoric. The task of studying and understanding the real world,
especially in a problem-solving manner, is for Sharah scholars and
Islamic finance practitioners as much as it is for anyone else. That is
why a doctoral system of higher education, if adopted and utilized,
can be beneficial, as long as lessons are learned from the pitfalls of
the modern higher education, and those are duly incorporated in the
education and training of a new generation of scholars, experts and
practitioners.

IV. SHARAH NON-COMPLIANCE RISK
AND DUE PROCESS
To place the relevant issues in context, it is important to note the
landmark AAOIFI ruling of February 2008 and Shaykh Taqi Usmanis
statement that preceded it in November 2007 at the World Islamic
Banking Conference, which highlighted another set of challenges
that the industry lives in fear of on a day-to-day basis. The first is
that there is no universal framework of due process that scholars
must follow before they issue public opinions contrary to previous
opinions expressed by themselves or other scholars. This effectively
places the industry hostage to the change of attitude by scholars who
have gained prominence through their years of serving the industry.
Certainly, such change in attitude must be accommodated, as certain
practices that may be tolerated during the embryonic stage of the
Islamic finance industry may not necessarily be acceptable when the
industry has stronger infrastructure support and is able to influence
its institutional environment.
The second issue relates to who can issue these opinions. Can
the market determine who issues such opinions (i.e. shareholders
appointing those whom they deem to be most appropriate to issue
rulings)? Or does a Sharah scholar get recognised from years of
recognised service by peers or by a certain community/group of
people/followers? As has been suggested by some industry experts,
152
for jobs related to providing objective independent opinions based on
Sharah rules, the market can be a bad judge as those who charge
less for their services and are willing to provide more convenient
opinions from the point of view of shareholders will be chosen over
the more knowledgeable. (Al Jarhi, n.d.). Apart from the lack of a
widely agreed process of eliciting and establishing a juristic opinion,
there is also the issue of fatwa shoppingthe process of searching
for suitable religious opinions (Hosen, 2008).
The abovementioned fatwa shopping takes a whole new
dimension when the matter of fatwa is part of a professional process
serving the financial sector. This phenomenon has been highlighted
by Foster (2009) as follows:
[A]s one investment banker based in Dubai, working for a
major Western financial organisation, explains: We create
the same type of products that we do for the conventional
markets. We then phone up a Sharia scholar for a fatwa [seal
of approval, confirming the product is Sharah compliant].
If he doesnt give it to us, we phone up another scholar, offer
him a sum of money for his services and ask him for a fatwa.
We do this until we get Sharia compliance. Then we are free
to distribute the product as Islamic.
This is probably an exaggeration, as explained by prominent scholar
Sheikh Nizam Yaquby (Aleqt News, 2010).

But the perception persists,
and it presents a handicap for the credibility of the industry and its
gatekeepers. While no system is foolproof, university education and
PhD programs are the modern substitute for old education systems
since they are more reliable and transparent in a world with less
scientific integrity.
One point is clear: Sharah scholars with little formal education,
but strong market credibility, may hamper the growth of this industry
by issuing rulings which are contrary to generally accepted Sharah
principles and without enough formal documentation to explain their
rationale. Of course, as is well established, the Sharah scholars
generally have a micro-juristic approach focused on the contracts,
without considering any macro-level implications. There is also hardly
any effort on the part of these scholars to undertake any ex-post study
of their own works/rulings/decisions. The resulting shortcomings of
all these aspects may impair the reputation of the industry by reducing
153
the perceived value of the stringent process of deliberation that was
originally the hallmark of the Islamic legal system. This is especially
important because fatwas issued are often not disclosed, the rationale
(dall) is not provided, and any error or major controversy regarding
an issued fatwa is never publicly acknowledged.
The Sharah conversion technology debacle sparked by some
well-known Western investment bankers touting the ability to extract
un-Islamic returns from Islamic assets is a case in point (DeLorenzo,
n.d.). In that episode, one Sharah advisory firm and scholars fatwa
was roundly condemned by two other scholars. In hindsight, the main
lesson of that debacle was that scholars should consider the macro-
level repercussions of their actions when they go about approving
Islamic products.
V. WHO GUARDS THE GUARDS THEMSELVES?
The question that then arises is how the industry should best regulate
the function of Sharah compliance to address the aforementioned
challenges, increase the supply of Sharah scholars and stimulate the
sustainable growth of the Islamic finance industry.
It is clear that neither AAOIFI nor any other body can establish
a supranational Sharah supervisory board without cooperation from
all regulators. Even if such a board was somehow established, it
would be presumptuous to expect that it could promulgate unified
rulings for all institutions and products in the world. Instead, going
beyond professional qualifications for industry professionals, the
need of the hour is to promulgate standards/guidelines (that apply
across jurisdictions) establishing a transparent set of criteria for being
recognised as a legitimate Sharah scholar and the pre-requisite due
process for issuing opinions (fatw).
As of now, the AAOIFI (2010) Governance Standard No.1,
Sharah Supervisory Board: Appointment, Composition and
Report, only specifies one vague requirement, which might be
better interpreted as a description than a requirement: A Sharia
supervisory board is an independent body of specialised jurists in fiqh
al muamalat (Islamic commercial jurisprudence).
4
Certainly, it
would be worthy if AAOIFI were to supplement this statement by
4 Notably, commercial jurisprudence is an important, but a rather small, subset of
mumalat.
154
establishing a transparent set of criteria that could be flexible enough
to accommodate variances in practice between countries and regions.
Similar to other professional bodies such as the CFA Institute or
the Institute of Chartered Accountants, the AAOIFI could mandate
the required level of experience and education and certify Sharah
scholars on this basis. Such bodies must be independent like these
existing professional institutes. The experience and education could be
from varied sources so long as they are transparent and independently
verified. A hypothetical set of criteria could be as follows:
Peer Recognition
1. A letter of recommendation from three recognised or certified
Sharah scholars stating that the candidate has the requisite
level of Sharah knowledge, experience and acumen to issue
and determine opinions on Islamic law relating to commercial
matters only. (Recognised Sharah scholars for the purposes
of this guideline would be all scholars who currently serve
on at least three boards of Islamic financial institutions or
infrastructure institutions, and Certified Sharah Scholars would
be those who are already certified by AAOIFI.) This is, on the
one hand, similar to ijzah from the classical Islamic tradition
and, on the other hand, equivalent to the modern protocol of letter
of recommendation from mentors, professors or peers.
Education
In addition to the above,
2. A doctoral degree from a recognised university (list of universities
that meet certain criteria/standards including relevant curriculum;
list to be determined by the Sharah board of AAOIFI and/or
other standard-setting institutions), or
3. At least 5 (or xx) years at an established Islamic seminary
studying Islamic law (not Arabic only) under a recognised scholar
with a diploma from the institution and a letter of reference from
that scholar. (Certificates such as the CSAA may contribute to
one or two years of relief from Islamic seminary studies or from
mentored experience requirements), or
4. Where no formal Sharah-related education is demonstrable,
then 15 (or xx) years of mentored experience under a recognised
or certified scholar with a letter of recommendation from that
scholar must be provided.
155
Experience
In addition to the above,
5. At least 10 years of Sharah-compliance auditing or advisory
experience as evidenced by a letter of reference from the Chief
Operating Officer (COO) of the financial institution, or
6. At least 10 years of counselling on matters of Islamic commercial
law as evidenced by 3 letters of reference from independent
professionals or government officers.

Furthermore, there should be a continuing education requirement,
which can be substituted for by research output, for continuing
certification or affiliation. Guidelines such as the illustrative sample
above provide the would-be scholar with a clear set of objectives
requiring a combination of education, experience and mentor
recognition by which he can plan his career.
The sample guidelines recognise that there is a multiplicity of
ways that a Sharah scholar is accepted by his peers and that not all
Sharah scholars will need to fit into an exact definition. Needless to
say, the AAOIFI Sharah Board or other similar bodies, including the
Islamic Financial Services Board (IFSB), would be the best placed to
determine the exact requirements, and any such requirements must
include the following components in some combination: doctoral
research and degree; apprenticeship/experience, and continuing
education.
VI. DUE PROCESS
Similar to the challenge of recognising Sharah scholars, the AAOIFI
Sharah standards are not clear regarding the appropriate due process
to be undertaken prior to issuing an opinion. As discussed, this means
that an opinion can be issued without due care or proper consultation
of peers. If AAOIFI, along with other standard-setting institutions
such as the IFSB, becomes the official or de facto gatekeeper to the
next generation of Sharah scholars through a proper, independent
certification process, it can also influence this next generation to
adopt more stringent procedures when issuing an opinion, without
which their certification as a Sharah scholar could be revoked.
For instance, AAOIFI/IFSB could require all certified scholars
to provide annual reporting of all fatwas certified by them and the
general principles (including arguments and evidence) utilised
156
by these scholars in coming to their conclusions. Needless to say,
for competition purposes, the reporting can be limited to general
principles utilised and the product features desired without specifying
the exact product details. Alternatively, it could provide the full
minutes of the meetings, with the AAOIFI/IFSB being bound to
observe confidentiality.
In addition, the AAOIFI/IFSB could require Sharah scholars to
adopt a particular form or checklist which they have to address prior
to issuing a fatwa.
In return, the AAOIFI/IFSB will stand by all Sharah opinions
by certified scholars, as long as they are in conformity with Sharah
principles as enunciated by the AAOIFI/IFSB Sharah standards.
Where there are new Sharah principles utilised, previously not the
subject matter of any standard, the Sharah scholars are to provide
an explanation to AAOIFI/IFSB, which will be kept confidential for
at least 2 years and up to 10 years at the request of the scholar, after
which it will be made available for public viewing.
This process will also help build a disciplined body of Islamic
commercial law for Islamic finance that is based on incremental
rather than random and unstructured development. All these require
a systematic process of recognizing and appointing Sharah scholars
serving the industry and ensuring certain standards by which they
continue to serve.
VII. CONCLUSION
This paper describes the significant Sharah-related challenges
which are constraining the growth of Islamic finance in an attempt
to provide some recommended solutions to the regulators such as
AAOIFI and the IFSB.
The solutions are meant to enhance and strengthen the position
of scholars as the gatekeepers of the Sharah in Islamic finance by
establishing a clear set of guidelines by which they regulate themselves
and their peers. Clearly, the AAOIFI and IFSB standards have
significant influence on Islamic financial institutions, and they would
be best placed to establish such a guideline/standard. Furthermore,
since this is an area involving practitioners, independent institutions
similar to those that grant CFA (Chartered Financial Analyst), CPA
(Certified Public Accountant) and other professional qualifications/
designations are greatly needed.
157
Two major consequences may occur if such self-regulation initiatives
are not undertaken by the scholars themselves. The first is regulatory
capture, wherein, due to the consistent threat of legitimacy facing
the role of scholars in Islamic finance, the industry and its regulators
(such as the central banks and securities commissions) take it upon
themselves to regulate the activities of scholars to ensure that there is
minimal disruption to market activities.
The second, and by far the more drastic consequence for the
industry as a whole, is that one scholars actions threaten to place
the legitimacy of the entire Islamic finance industry and its central
principle of Sharah compliance in disrepute, thereby dramatically
eroding market share of Islamic financial institutions and funds vis-
a-vis their conventional counterparts.
It is up to AAOIFI and its peer standard-setting institutions and the
Sharah scholars to consider these and other suggestions and come
up with a solid governance mechanism for the sake of the industrys
legitimacy in the eyes of the common Muslim and to ensure proper
and effective preparation of the Sharah scholars in terms of their
education, experience and the ability to serve as the stewards of
the discipline. Beyond application and praxis, this will enhance
the industrys capacity and contribution in the areas of knowledge
creation as well as transfer of knowledge to the next generation.
158
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