May 1 (Bloomberg) -- Sheikh Nizam Yaquby is the gatekeeper to the $1 trillion market for managing Muslim wealth.
Yaquby, who lives in Bahrain, says he's on advisory boards of 40 finance companies, and tells Citigroup Inc., American International Group Inc. and HSBC Holdings Plc 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 $70 billion of Islamic debt outstanding can be traded and companies would have been unable to sell any of the $17 billion new offerings last year, according to data compiled by 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 Plc 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 Plc's Internet Securities Inc.
The advisers say they can earn as much as $1 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 AG, HSBC and Barclays Plc in London, Paris-based BNP Paribas SA and Citigroup in New York -- have Islamic units. CIMB Group Bhd. in Kuala Lumpur is the biggest underwriter of sukuk this year followed by Standard Chartered in London, Barclays and Citigroup, Bloomberg data show.
Sales of sukuk grew nine times faster than international corporate bonds last year and twice as fast as the U.S. market for debt with ratings below investment grade, according to Bloomberg data. The assets managed under Islamic rules will almost triple by 2015 to $2.8 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, said Rushdi Siddiqui, who runs Islamic indexes for Dow Jones & Co. 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 said the biggest international banks pay scholars annual retainers of $20,000 to $50,000. Mohamed Ma'sum Billah, a scholar in Selangor, Malaysia, sits on about 20 boards. Fees are as high as $100,000, up seven- fold from 2002, he said.
Advisers also receive $1,000 to $3,000 each time they meet with a client, said Mohammed Daud Bakar in Kuala Lumpur, who works for HSBC, BNP Paribas and Frankfurt-based Deutsche Bank AG. Monzer Kahf, a scholar based in Westminster, California, said the total works out at $200 to $500 an hour, or as much as $1 million a year for a 45-hour working week.
While there are more than 20 Islamic scholars, the international banks want the top names, said Majid Dawood, chief executive officer of Yasaar Ltd., a Dubai-based consultant that advises Paris-based Societe Generale SA, Royal Bank of Scotland Group Plc in Edinburgh and Dublin-based Bank of Ireland Plc.
``Everyone wants the star scholars but you can't have Brad Pitt in every film,'' Dawood said.
``Scholars are overstretched,'' said 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.
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Getting approval from scholars takes a minimum of two weeks, says Hissam Kamal, head of Islamic finance for HSBC Saudi Arabia Ltd. 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 said. ``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, said Ruggiero Omar Lomonaco, head of Islamic investor products in Dubai for ABN Amro Holdings NV.
``Every day, at all times, I have to receive calls and e-mails and deal with them,'' said Muhammad Imran Usmani, a 37- year-old Pakistani who advises Amsterdam-based ABN Amro 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 & Co. are among 29 firms that seek advice from Mohammed Elgari in Saudi Arabia, according to Euromoney. Thirty-five firms share Saudi scholar Dr Sheikh 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 $5 billion for his Saad Trading, Contracting & Financial Services Co. He will create a trust company called Golden Belt 1 Sukuk Co. that will lease the land to Saad Trading. Golden Belt will pass on the rent paid by Saad Trading to bondholders, avoiding interest.
``The land's value or what's built on it isn't hugely relevant to the sukuk,'' said Philipp 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.''
U.K. Treasury Minister Ed Balls last month said the government may sell Islamic bonds, following the German state of Saxony-Anhalt and Texas-based East Cameron Gas Co.
The Japan Bank for International Cooperation plans to sell as much as $300 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 $3.52 billion in November in the biggest sukuk sale. Nakheel increased the amount from an initial $2.5 billion target after underwriters Dubai Islamic Bank PJSC and Barclays Capital received orders for $6.25 billion. Investors drove up the price since the sale, reducing the yield to 6.13 percent from an initial 6.345 percent, Bloomberg data show.
Some Shariah rulings don't work around the world. Suria Capital Holdings Bhd., a Malaysian state-run property developer, last month sold 80 million ringgit ($23 million) of sukuk that wouldn't be accepted in the Persian Gulf. Suria sold port concession rights to two Malaysian banks arranging the bond sale. The banks sold the concessions back to Suria at a higher price and the money will be passed on to bondholders over 10 years.
The sukuk, approved by advisers including Mohammed Bakar, uses a contract called Bai Bithaman Ajil which scholars in the Gulf say doesn't comply with Shariah because the sale includes a profit margin that is akin to an interest payment. 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 Web site. 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, said Yaquby. Fees for advisers to local Islamic banks begin at about $3,000 a year, according to Billah in Malaysia.
``Most scholars are paid about the amount an investment banker would leave as a tip after dinner,'' said Siddiqui at Dow
Jones Indexes. The high earners are like ``rock `n' roll superstars,'' he said.
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 $115 trillion. They led a stream of Ph.D.s 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.
Black, who died in 1995, became a partner at New York-based Goldman Sachs Group Inc. Scholes, chairman of Rye Brook-based
Platinum Grove Asset Management, worked at Salomon Smith Barney and later at Long-Term Capital Management LP. Yaquby says he's forced to turn away banks because he doesn't have the time.
``If you want to become a judge it is not enough to graduate from law school, and if you graduate from medical school and go to a hospital they won't let you operate on people straight away,'' says Yaquby. ``This is a multi-disciplinary science and isn't learned in a few years.''