Islamic banks can charge for guarantees, says scholar

Daily News Egypt
3 Min Read

KUALA LUMPUR: Sharia banks should be allowed to charge a fee for giving guarantees, a top religious scholar said on Wednesday, issuing an opinion on an issue that has so far divided the $1 trillion Islamic finance industry.

Mohd Daud Bakar – who advises the globally recognized Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) – said views on whether Sharia banks can charge fees for guarantees are changing with the times.

Some Sharia scholars have said financial institutions ought not levy a charge for granting guarantees, a move that would affect Islamic letters of guarantee and performance bonds.

However, Daud dismissed the objection, saying commercial realities demand a payment in return for the transfer of risk.

How can you expect the bank to guarantee to the government that the contractor will deliver on time without charging the contractor any fees? Daud told Reuters on the sidelines of an Islamic investment forum.

Some Islamic banks impose a charge for guarantees, while others do not, he said.

In the past, guarantees have been by family members, it was very much a one-to-one kind of transaction. But now it s become a financial product, Daud said.

Sharia scholars are gatekeepers of the Islamic finance industry. They advise financial institutions and their approval is needed before a product can be marketed as a Sharia instrument.

Investors usually want to know which Sharia scholars have approved an instrument before deciding whether to put their money in a product. These religious advisors are usually experts in Islamic economics, international finance and law. Some are known to be adopting a more conservative view than others.

Daud said the bank to whom a risk has been transferred cannot package and sell it on because you are splitting the risk and the asset , a practice that would be akin to credit default swaps in conventional banking.

Meanwhile, the AAOIFI is one of the top standard-setting bodies for Islamic finance in the Middle East. Daud also advises BNP Paribas Bahrain.

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