Riyadh, Asharq Al-Awsat- When Sheikh Muhammad Taqi Usmani, Chairman of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued a statement to the media in which he said that 85 percent of sukuk (Islamic bonds) are non-Shariah compliant, it spread like wildfire causing disruption and confusion in the Islamic banking industry.

Skepticism and suspicion over the legitimacy of the existing sukuk has become the norm. Many statements were issued in succession by the concerned financial institutions, both optimistic and pessimistic, about the future of this tool [Islamic bonds], in light of the existing jurisprudential dispute, and the extent of its present and future impact on the issuance of sukuk in the region.

Obscure and unspecific, the statement did not clarify whether this percentage relates to a particular structure of sukuk or to the totality of Islamic bonds. And if it applied to a certain type only, which one was meant: Ijarah, Musharaka, Mudaraba or Wakala? Or was it another type?

Such obscure statements are fertile ground for interpretation and everyone reads them in accordance with their own understanding and extent of knowledge. However, since such ambiguity inflicts serious damage on the credibility of this tool in financial markets and since the finance industry is highly sensitive towards anything that could affect the customer’s confidence, it was the AAOIFI’s duty to try and contain this crisis by calling a press conference. The Chairman of the AAOIFI, Sheikh Muhammad Taqi Usmani could have clarified the statement and revealed which type of sukuk was referred to, its non-Shariah compliant aspect and also disclosed what percentage of overall Islamic bonds they comprise, in addition to how this dispute affects present and future issues.

Furthermore, the organization should have issued a written statement to the media clarifying its position towards this view and its set criterion with the regards to the contentious structure in question (if any) and also made itself open and available to respond to any queries. As such, the scope of the disputed sukuk would have been identified so that the market would not be affected as a whole. However, the organization took no such action.

At first, the organization denied the statement through Secretary-General [Dr. Mohammed Nedal al Chaar] who said that the Sheikh’s statement reflected his personal opinion and did not express the organization’s view. Following, he made a statement to Asharq Al-Awsat in which he said that the AAOIFI had set up a committee entitled with the task of examining and evaluating the controversial Islamic bonds in question after which the committee’s proposals and recommendations will be submitted to the AAOIFI for consideration so that it may issue a decision accordingly.

Dr. Chaar pointed out that this disruption is due to deviations committed by financial institutions that do not adhere to the issued Shariah standards. He also acknowledged that the sukuk market has been largely impacted by these events and that international banks and financial institutions are currently hesitating to enter this market.

The AAOIFI has committed a grave mistake in dealing with this crisis on two levels:

Firstly, disclaiming its responsibility for the statements made by its chairman. The organization’s initial reaction gave the impression that the Sheikh’s statements were a result of changing his own opinion, which in turn fuelled an atmosphere of mistrust in the solidity of the jurisprudential opinions issued by the members of Shariah authority committees.

This is despite the fact that Sheikh Muhammad Taqi Usmani did not add anything to the Shariah standard article number (5.12.13.17.21), which was previously issued by the AAOIFI. This was explicitly clear in the statements issued by the organization’s Shariah council last 13-14 February 2008 with regards to the remarks and questions raised around sukuk, and which also backed Sheikh Taqi Usmani’s statement.

Secondly, the act of ascribing the deviation from legitimate Shariah standards to the financial institutions that issue sukuk at a time when some members of the Shariah authority councils are adopting the issuer’s commitment to repurchase at nominal value as a transitional procedure.

This crisis has shown us that mishandling crises can lead disasters. This indicates that the decision-makers in the Islamic banking industry must learn to manage crises.

* Lahim Nassar is an Islamic banking adviser.