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DDCAP Limited Organises Landmark Shariah Forum for its Saudi-based Bank Clients in Riyadh

In an ever-changing global financial landscape, financial institutions all over the world are expected to follow greater disclosure, compliance and transparency regimes.

The global Islamic finance industry is no exception. Islamic finance is unique in that it has an extra tier of compliance – that of ethical compliance to ensure that the institution’s products and services comply with the various provisions of Fiqh Al-Muamalat (Islamic Law Relating to Financial Transactions).

Adherence to Shariah Principles is extremely important because it gives comfort, clarity and confidence to customers in a particular market about the Shariah authenticity of products, services and processes; and serves to protect the best interests of both financial institutions and clients. The aim is also to bridge and ease the conceptual gap amongst bankers, investors and customers between Islamic banking theory and practice. As such, the importance of fostering a culture of dialogue and transparency between a bank’s clients and its Shariah Supervisory Board should not be understated nor underestimated.

Indeed, DDCAP Limited, having served the global Islamic finance industry for almost two decades, embarked on exactly such a dialogue this month when it held a meeting at the Riyadh Marriot Hotel to introduce its Shariah Supervisory Board (SSB) to its Saudi-based client banks. The interactive dialogue comprised presentations by senior DDCAP executives and the Chairman of the Company’s SSB, and a lively questions and answers session with client banks, which included several technical queries relating to the mechanism and processes involved in commodity-based Tawarruq and Murabaha transactions.

DDCAP in fact has an all-Saudi Shariah Supervisory Board comprising three prominent Shariah Scholars, namely H.E. Sheikh Abdullah Bin Suleiman Almaneea (Chairman), H.E. Sheikh Dr. Abdullah Almutlag (both are Members of the Council of Senior Scholars in Saudi Arabia and Advisors to the Royal Court) and Sheikh Dr. Mohamed Ali Elgari who, in addition to being a Shariah Scholar, is also a University of California at Berkeley educated economist.

This practice of demystifying Islamic finance by forging a direct dialogue between the SSB and a bank’s clients’ is not new in the Kingdom. Most banks in Saudi Arabia hold such meetings between its Shariah Board and its customers and employees.

However, to consolidate its business and Shariah-compliant product credentials, DDCAP has gone that extra mile by not only establishing a SSB, but also appointing a full time Shariah Liaison Director, Dr. Fareed Hamed, a seasoned Saudi Islamic banker who is based in Jeddah.

At the Shariah Review and Open Forum held at the Riyadh Marriot Hotel in June, Lawrence Oliver, Director and Deputy Chief Executive Officer of DDCAP, introduced the company and its role as a pre-eminent intermediary in the Islamic financial marketplace.

London-based DDCAP Limited is majority owned by ICAP Private Group Limited (IPGL), and its 35 plus professionals are exclusively focused on the provision of Shariah-compliant financial services to its clients. DDCAP has a 9-member management team benefitting from over 90 years of combined experience in the Islamic financial industry. DDCAP also has two wholly owned subsidiaries – DD&Co Limited (“DD&CO”), a merchant trading company which was originally founded in 1928, and DDGI Limited.

DD&Co today acts as a commodity facilitator and counterparty for the Islamic transactional requirements of its clients, and is a member of the London Metal Exchange (LME) and the London Platinum and Palladium Market (LPPM). DDGI Limited focuses on direct investment in Islamic financial sector opportunities, having been a founder shareholder of the Islamic Bank of Britain plc and also having a joint venture Islamic capital markets Sukuk initiative with ICAP plc, the world’s leading electronic inter-dealer broker.

The London Metal Exchange (LME), explained Lawrence Oliver, is the oldest financial exchange in the world, which was established in 1877. “The LME has the largest physical, OTC (over the counter) environment of any world commodity market and is therefore ideally suited to supporting the transactional volume requirements of the Islamic marketplace,” he added.

The LME has approved more than 700 warehouses and storage facilities in about 40 locations across Europe, Asia and the USA. As a further measure to ensure its independence and uphold prudential governance, the LME neither owns or operates the warehouses nor owns the commodities or metals contained therein. Other than overseeing the business and good conduct of the Exchange and its members, the LME’s role is to oversee the LME related activities and operations of the warehouse operators and warehouses to ensure their compliance with market standards. On an annual basis, the LME’s own audit teams visit the warehouses to test and ensure adherence to its stipulated rules. In contrast to the LME, the London Platinum and Palladium Market (LPPM) was established in 1987 and is a trade association, its purpose being to promote professional trading of both Platinum and Palladium in London.

While DD&Co has provided physical commodity trade facilitation to its customers for over fifteen years, its two senior executive directors, Stella Cox, Managing Director and CEO, DDCAP Limited and Lawrence Oliver, have been active in the Shariah-compliant institutional marketplace for over three decades.

The global Murabaha and Commodity Murabaha (Tawarruq) business is in excess of US$1 trillion per annum. The direction of financing of the Islamic finance industry has traditionally been overwhelmingly weighted towards Murabaha business – up to 80 per cent in the first two decades of the contemporary Islamic finance industry. But over the last decade or so, this figure has come down to about 60 per cent because of the emergence of new asset classes such as Sukuk, evolving asset management capability and the expansion of development and project finance.

Commodity Murabaha (Tawarruq), which is widely used to facilitate short-term liquidity management for institutions and cash management for individuals, has in recent years come under greater scrutiny, especially in relation to the physical ownership of a particular commodity at any given moment in the transaction chain, and in relation to the nature of the involvement of any Third Party in the transaction, to ensure that the Shariah investment process is fully compliant.

According to Lawrence Oliver, whilst DD&CO will always endeavour to ensure its available commodity capacity provides scope for exceptional and occasionally sizable additional customer commodity supply requirements, there have been occasions when the company has been asked to facilitate supply of a specific commodity and has declined due to underlying commodity market conditions. DD&Co’s internal risk management controls and stipulations, emphasized Mr Oliver, “prohibit short sales by DD&Co thus ensuring Shariah adherence at all times.”

“Any commodity supplied by DD&Co to customers,” explained Lawrence Oliver further, “is owned by DD&Co at the point of sale (ie DD&Co has unfettered title to the commodity) and available for physical delivery if requested. DD&Co’s supplies of commodities are classed as actual or physical, meaning that all commodities it supplies are fully identifiable (type, class, quality, location) at the point of sale. Upon allocation of a commodity to a specific customer, DD&Co’s policies and procedures prohibit the supply of the physical commodity to any other customer whilst the transaction is in process. Furthermore, DD&Co only effects sales of commodity in whole amounts and relevant market “lot” sizes for, without such controls being in place, it would not be possible to effect true, physical delivery.”

At the DDCAP client banks meeting in Riyadh, Lawrence Oliver also explained the rationale behind the appointment of DDCAP’s own external Shariah Supervisory Board (SSB). The primary objective here is a “desire to further demonstrate DDCAP’s on-going willingness to subject the substance and integrity of its business and service provision to regular Shariah review and validation at the highest level.”

The specific mandate of the DDCAP SSB is to exclusively review from a Shariah perspective the Company’s Islamic Commodity Trade Services and processes. H.E. Sheikh Abdullah Bin Suleiman Almaneea, Chairman of DDCAP’s SSB, addressing the Company’s client banks meeting in Riyadh, similarly discussed the real time operational aspects of the Board’s Shariah governance process. He explained that during the inaugural visit of the SSB to DDCAP’s Head Office in London in March 2013, for instance, the Board conducted a thorough review of DDCAP’s documentation, systems and procedures.

H.E. Sheikh Almaneea also revealed to the audience of client banks that as part of the Shariah governance process, the Shariah Supervisory Board members also visited the London Metal Exchange and actually travelled to an LME approved warehouse operator in order to gain a better understanding of the processes and procedures which support DDCAP’s ability to supply physical commodity assets to the Islamic financial marketplace.

Upon completion of their review, the SSB issued a Fatwa to DDCAP supporting the substance of and the processes and procedures conducted through its services related to commodity-based Tawarruq and Murabaha transactions. The meeting adjourned following an open Question and Answer session during which attendees were invited to direct technical and Shariah related questions to DDCAP’s directors and the esteemed members of the DDCAP Shariah Supervisory Board respectively. Thereafter, the attendees were invited to enjoy a lunch hosted by DDCAP during which extremely positive feedback was expressed by all.

 

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