SHEIKH Nizam Yaquby is the gatekeeper to the $US1 trillion ($1.2 trillion) market for managing Muslim wealth. Yaquby, who lives in Bahrain, says he's on advisory boards of 40 finance companies, and tells Citigroup, American International Group and HSBC Holdings which insurance policies, accounts and bonds they can sell to devout Muslims. Just as Wall Street turned to Nobel Prize winner Myron Scholes in the 1980s to help make derivatives the fastest growing financial market, banks can't find enough scholars steeped in the teachings of Muhammad to accommodate the demand for new bonds that conform to Shariah law.
Without men like Yaquby to bless the borrowings, none of the $US70 billion of Islamic debt outstanding can be traded and companies would have been unable to sell any of the $US17 billion in new offerings last year, according to Standard & Poor's and Bloomberg.
"The credibility of institutions comes from the stature of the Shariah boards they have," said Afaq Khan, head of Islamic banking at Standard Chartered in Dubai, the world's second biggest underwriter of Islamic bonds. "Transactions can get shot down at the structuring stage if scholars don't allow them."
Yaquby sits on more company advisory boards than any of the 20 top scholars who tell banks which bonds meet the requirements of Shariah law, according to London-based Euromoney Institutional Investor's Internet Securities.
The advisers say they can earn as much as $US1 million a year for providing their expertise.
Shariah requires that investors profit only from transactions based on the exchange of assets, not money alone, so interest is banned. Bankers sell Islamic bonds, or sukuk, by using property and other assets to generate income equivalent to interest they would pay on conventional debt. The money can't be used to finance gambling, guns or alcohol.
The world's top five banks by assets - Zurich-based UBS, HSBC and Barclays in London, Paris-based BNP Paribas and Citigroup in New York - have Islamic units. CIMB Group in Kuala Lumpur is the biggest underwriter of sukuk this year followed by Standard Chartered in London, Barclays and Citigroup.
Sales of sukuk grew nine times faster than international corporate bonds last year and twice as fast as the US market for debt with ratings below investment grade, according to Bloomberg data. The assets managed under Islamic rules will almost triple by 2015 to $US2.8 trillion, according to the Islamic Financial Services Board, an association of central banks based in Kuala Lumpur.
International banks, mostly in London, use the same scholars for religious rulings, or fatwas, says Rushdi Siddiqui, who runs Islamic indexes for Dow Jones in New York.
"Unfortunately people think we are overpaid but this isn't true," Yaquby, dressed in a traditional white ghutra headcloth and ankle-length dishdasha robe, said in an interview in Dubai last month. "They don't look at what bankers and lawyers are being paid. Yet the CEO of an Islamic bank can't take a decision without the scholar."
Yaquby says the biggest international banks pay scholars annual retainers of $US20,000 to $US50,000. Mohamed Ma'sum Billah, a scholar in Selangor, Malaysia, sits on about 20 boards. Fees are as high as $US100,000, up sevenfold from 2002, he says.
Advisers also receive $US1000 to $US3000 each time they meet a client, says Mohammed Daud Bakar in Kuala Lumpur, who works for HSBC, BNP Paribas and Frankfurt-based Deutsche Bank. Monzer Kahf, a scholar based in Westminster, California, says the total works out at $US200 to $US500 an hour, or as much as $US1 million a year for a 45-hour working week.
While there are more than 20 Islamic scholars, the international banks want the top names, says Majid Dawood, chief executive officer of Yasaar Ltd, a Dubai-based consultant that advises Paris-based Societe Generale, Royal Bank of Scotland in Edinburgh and Dublin-based Bank of Ireland. "Everyone wants the star scholars but you can't have Brad Pitt in every film," Dawood says. "Scholars are overstretched," says Abdallah Kubursi, regional vice-president in Dubai for AIG, the world's biggest insurance company. New York-based AIG started a Bahrain-based Islamic insurance unit in October to target 300 million customers.
Getting approval from scholars takes a minimum of two weeks, says Hissam Kamal, head of Islamic finance for HSBC Saudi Arabia in Riyadh.
"For an established issuer that could tap the conventional bond market in just a few days, there's a significant extra lead time for Shariah compliance," Kamal says. "You can't complete documentation and a fatwa in a week. It will be two or three weeks at best."
The process can take six months, says Ruggiero Omar Lomonaco, head of Islamic investor products in Dubai for ABN Amro.
"Every day, at all times, I have to receive calls and emails and deal with them," says Muhammad Imran Usmani, a 37-year-old Pakistani who advises Amsterdam-based ABN and Credit Suisse Group in Zurich. "The problem is we have a limited number of scholars who are working internationally," he said in an interview in Dubai, while keeping one eye on his BlackBerry.
Credit Suisse and New York-based Merrill Lynch are among 29 firms that seek advice from Mohammed Elgari in Saudi Arabia, according to Euromoney. Thirty-five firms share Saudi scholar Abdul Sattar Abu Ghuddah.
The Shariah finance industry, born in the 1970s after a 12-fold jump in oil prices, is expanding with crude prices near record highs enriching Islamic nations.
Billionaire Maan al-Sanea, the second biggest shareholder in HSBC, plans to use property in eastern Saudi Arabia to raise as much as $US5 billion for his Saad Trading, Contracting & Financial Services Co. He will create a trust company called Golden Belt 1 Sukuk Co, which will lease the land to Saad Trading. Golden Belt will pass on the rent paid by Saad Trading to bond holders, thus avoiding interest.
"The land's value or what's built on it isn't hugely relevant to the sukuk," says Philip Lotter, a corporate finance analyst at Moody's Investors Service in Dubai.
"Its purpose is to provide an asset that Saad Trading can pay rent on," he says.
UK Treasury Minister Ed Balls last month said the Government might sell Islamic bonds, following the German state of Saxony-Anhalt and Texas-based East Cameron Gas Co.
The Japan Bank for International Co-operation plans to sell as much as $US300 million of sukuk in Malaysia. Tokyo-based Aeon Credit Service Co in January became the first Japanese company to sell Islamic bonds.
Nakheel PJSC, the Dubai developer building islands in the shape of palm trees for luxury homes in the Persian Gulf, raised $US3.52 billion in November in the biggest sukuk sale. Nakheel increased the amount from an initial $US2.5 billion target after the underwriters received orders for $US6.25billion.
Shariah scholars need to be experts on the Koran, commercial law and finance. Yaquby has a degree in comparative religion and economics from McGill University in Montreal, according to his profile on HSBC's website. He learned Shariah in Bahrain, Saudi Arabia, Egypt, India and Morocco, according to Calyx Financial, a New York-based asset management firm that includes Yaquby among its advisers.
Scholars find it hard to make a living when they start, says Yaquby. Fees for advisers to local Islamic banks begin at about $US3000 a year, according to Billah in Malaysia.
"Most scholars are paid about the amount an investment banker would leave as a tip after dinner," says Siddiqui at Dow Jones Indexes. The high earners are like "rock 'n' roll superstars".
Professors Fischer Black and Scholes in 1973 created the mathematical model to value options that is now the cornerstone of a market with an underlying value of $US115 trillion. They led a stream of PhDs dubbed "quants" to Wall Street to work on derivatives, contracts whose value is derived from underlying assets, including stocks, bonds, currencies and commodities, and events such as changes in interest rates and the weather.
Bloomberg
