Moves to plug the gap in Islamic finance carry risks
The Financial Times has published an article detailing some of the risks involved in Shariah-Compliant Finance.
For instance, a new term has been developed for the financial world: “Shariah risk.”
Shariah risk is the risk that a product that was previously believed to be shariah-compliant could be declared “un-Islamic” by a prominent shariah scholar. Basically, what it all boils down to is that some shariah scholars have more influence than others. So, if you start of a shariah-compliant fund and hire three shariah scholars to keep you compliant, there is still a chance that your scholars could be countermanded by someone more prominent.
This might explain why the most prominent shariah scholars appear on as many as 46 shariah advisory boards at the same time–and enrich themselves in the process.
Second, the article correctly points out that shariah-compliant products have NOT been immune to the impact of the global financial crisis. We have written extensively on this at SFW, largely because many in the Islamic world lie about this fact and claim that Islamic finance is the key to world economic recovery because it has some magical immunity to the downturn.