The changing role of the Shariah Scholar in Islamic Finance

12th January 2009

There is no doubt that the Islamic finance industry is rapidly growing at a pace that is running ahead of the emergence of new Shariah Scholars with expertise in Islamic finance. In the midst of the turmoil in the world’s financial sector, financial institutions are exploring alternatives to conventional finance and in particular are turning towards Islamic finance, which continues to attract interest from around the world at an unprecedented pace. Such growth of the industry requires the services of competent Shariah Scholars in order to adequately guide financial institutions in pursuing legitimate Shariah compliant products and services.

It has been seen in the past decade or so that only a handful of Scholars with the relevant expertise are available to financial institutions to approve their products and services. Although the numbers of competent Scholars have increased in the last two or three years, there is still inadequate involvement of Scholars in Islamic finance transactions, products and services offered by financial institutions to their customers.

Shariah Scholars should and do play a significant role within financial institutions active in the Islamic finance sector, as without them such financial institutions are unable to operate their business activities in accordance with the principles of Shariah. Financial institutions wishing to engage in providing Shariah compliant products and services must engage either a minimum of three individual Shariah Scholars and form a Shariah Supervisory Board (“SSB”) or engage consultants who should be  recognised Islamic scholars in their own right and  able to provide Shariah guidance to their clients.

Products based on well established Shariah principles, such as Murabaha, Wakala and Ijarah, usually require minimal involvement of a Shariah Scholar due to their relatively standard forms. However, products and services provided by financial institutions have evolved over the years (whether for good or worse!) in a much more sophisticated and complex manner.  The new innovative products available, such as different types of debt/ equity Sukuk, the more controversial Wa’d based instruments and structures based on intertwined Shariah structures, require much greater involvement of the Scholar. Some of these so called ‘innovative’ structures and products continue to be scrutinised for their actual Shariah compliance and whether they succeed in achieving the objectives of Shariah.

The sophisticated and innovative nature of recent products and the complexity of the related documents require Scholars to be engaged on a full time basis to oversee their execution and implementation as well as to monitor the day to day activities of financial institutions dealing with such products. Scholars providing these services should be members of a SSB and certain executive powers should be vested in them to enable them to execute some simple and repeat transactions without having the need to convene a full SSB meeting.

This process will facilitate and achieve a number of benefits for financial institutions, including the smooth operation of the bank not only from a transactional aspect but also from day to day procedural and execution points of view. It will also help financial institutions to monitor all aspects relating to marketing materials, internal and external communications and so on.

The advantages of having a full time Scholar working within a financial institution who is also a member of the SSB are numerous. For example, my experience to date at Gatehouse in this role shows how it allows the Scholar to focus on internal product development and training, as well as facilitating Shariah audit and compliance. Some of these advantages are discussed below:

Firstly, the financial institutions themselves will have regular and easy access to the Scholar which will allow them to obtain guidance on the hour, every hour, without having to wait for a response from the SSB or having to convene a SSB meeting. It is worth pointing out here that regardless of how simple an issue may be a banker is unable to make a final decision on a Shariah issue without referring the matter to a Scholar.

The problem with the accessibility to the Shariah Scholars is immense and needs to be addressed sooner rather than later. Critics would argue that certain Shariah Scholars sit on too many Shariah boards and take on too much responsibility and are not able to give much time to financial institutions as they are so thinly spread. Currently, however, there are only a handful of reputable and able Scholars who are familiar with modern economics and finance and they are working extremely hard to cope with the demand of the growing Islamic finance industry. The lack of Scholars creates a mismatch with the demands of business and creates a severe hindrance to the development of business activities of the financial institutions. On the whole this puts constraints on the financial institutions and the Shariah Scholars alike.


On the one hand, Scholars are being put under unrealistic time pressures to respond to Shariah queries and unjustifiably being held responsible for delaying transactions. However, we should not forget that Scholars also have family, social, religious and many other commitments like everyone else and it is not always reasonable to expect immediate attention and replies at all times from the Scholars in respect of particular Shariah issues. On the other, there will be times that financial institutions need advice promptly in order to make business decisions and cannot wait for days or weeks.  By working full-time for one particular institution, a Scholar is able to build on his in-house role and expertise to alleviate these pressures at other institutions by offering advisory services to third parties.  This is certainly one area of focus at Gatehouse Bank, and the team I am building there will be able to assist in structuring Shariah-compliant products and services, including the issuance of the required Fatwa, for our clients and customers.Secondly, by appointing a full time Shariah Scholar, financial institutions will be able to design their own programs for training junior graduates of Shariah to enable them to satisfy the demands of their businesses. On a wider scale, unless further graduate training programs are put in place, there will be a constant shortage of supply in meeting the increasing demands of financial institutions for Shariah Scholar’s.

An urgent assessment is required of the extent to which financial institutions have contributed towards bringing on board new Shariah Scholars. What support is being provided to new graduates of Shariah to get them more involved in the Islamic finance industry? Are they supporting any trainee programmes for newly Shariah graduates to gain experience? If we were to look back over the last 30 years or so, the truth is that some of the established Islamic financial institutions haven’t done enough to create opportunities for newly graduated Shariah Scholars.

Unless we adopt similar approaches to those of legal, accountancy and other professional bodies in developing our Shariah Scholar base, there is a real danger that the industry will be filled by un-qualified people who are not in a position to opine on Shariah matters. This will result in financial institutions carrying out transactions without correctly observing Shariah principles.

Thirdly, the appointment of a full time Scholar will greatly assist in the education and training of employees in the application of Shariah principles in all areas of the working environment. This is relevant to legal and compliance matters, and will greatly assist in all areas of the audit process, both internally and externally. In addition, Islamic financial institutions need to follow the instructions from the Shariah Scholar in their day to day activities such as the manner in which they conduct their business.  For example, adherence to Shariah principles of truth, transparency, honesty and fairness should be observed, whilst guests and clients should be entertained in a manner that complies with the principles of Shariah.

It is also important to ensure that Shariah principles are followed by an institution when it is dealing with its own employees. Sometimes they are not adhered to inadvertently due to the lack of knowledge or because the personnel that deal with the particular issues may not necessarily be aware what Shariah principles are at stake. It may not have crossed their minds that a particular issue may involve certain Shariah issues. The presence of a Scholar on a full time basis would alleviate this potential problem.

Adequate training of Islamic awareness in general and more specific training is paramount in order to facilitate the understanding of Islamic culture and the principles of Islamic finance. This is to ensure that Muslim and non-Muslim employees are equipped with the required knowledge and understanding of Islamic principles. The above ongoing training can only be achieved if a Scholar is engaged to identify all the needs of the business as a whole and also to cater for the needs of individuals within the financial institutions as and when required.

Certain critics argue that some Islamic financial institutions offer Shariah compliant products for commercial benefit only and there is no desire to follow the true spirit of Shariah principles. However, it should be remembered that earning a profit in a Shariah compliant manner is encouraged even from a Shariah perspective, although Shariah will never allow Islamic financial institutions to make gains in its name when their activities may not conform to the principles of Shariah. Financial institutions seeking to provide Shariah compliant products and services may overcome potential criticism by taking pre-emptive steps to engage a Shariah Scholar on a full time basis to oversee their day to day activities. This will boost the confidence of everyone associated with such financial institutions, whether employees or customers, and enhance the quality of the Shariah compliant activities of such financial institutions.
Originally published at www.newhorizon-islamicbanking.com

For all media enquiries, please contact:

Angelena Lee
Gatehouse Bank plc
Email : info@gatehousebank.com