The Malaysian law that exposes Shariah scholars to jail terms for rule breaches will ensure tighter compliance, in a market where the regulator has already made progress in unifying standards.

Under the Islamic Financial Services Act 2013, which took effect June 30, scholars may be jailed for up to eight years or fined as much as 25 million ringgit ($7.6 million) if they fail to comply with central bank rules. It’s the first time Shariah advisers have been expressly made accountable, according to Lee Hishammuddin Allen & Gledhill, a Kuala Lumpur-based law firm.

Malaysia set up a dedicated system in the 1990s to avoid disputes over the financing methods allowed by the Koran. Goldman Sachs Group Inc. was criticized by some advisers in 2011 for not ensuring its debut sukuk, approved by Ireland’s central bank, would be traded at par value as mandated by Islamic law. Some lenders are appointing scholars who don’t have a thorough understanding of financial products due to a shortage of experts, according to consultancy Amanie Advisors Sdn. in Kuala Lumpur.

“It’s a very good move to stress the accountability of Shariah boards,” Said Bouheraoua, a scholar who advises Affin Islamic Bank Bhd., said in an Aug. 16 interview in Kuala Lumpur. “A doctor who goes against the fundamental rules of medicine is accountable. The same goes for Shariah scholars.”

Scholar Shortage

Religious experts advise companies on whether their products and services comply with the Koran’s tenets. Under Bank Negara Malaysia regulations, a Shariah scholar can only sit on one board for each type of Islamic financial institution, meaning they can only advise one bank or insurer.

In most countries there’s no limit to the number of companies an expert can assist. One Syrian scholar was advising 101 financial institutions, standard-setting bodies and other entities, according to a 2011 report by Funds@Work AG, an investment research company based near Frankfurt.

The Malaysian single board rule has led to a shortage of scholars, according to Baiza Bain, the Kuala Lumpur-based managing director at Amanie. Demand for advice has increased as the nation’s Islamic banking assets climbed 6.3 percent to $162 billion in May from the end of last year, figures from the Malaysia International Islamic Financial Centre show.

“What the liability that’s presented by the Act does is to actually put more emphasis on training or retraining of experts,” Baiza said in an interview yesterday. “Financial institutions would have to put a higher standard of care because they know that the Shariah advisers are not going to just sit there and stamp whatever they have produced.”

Goldman Sukuk

Worldwide sales of sukuk, which pay returns on assets to comply with Islam’s ban on interest, have declined 35 percent to $21 billion so far in 2013 from the same period in 2012, data compiled by Bloomberg show. Issuance totaled a record $46.5 billion for the whole of last year.

The average yield on global Shariah-compliant securities rose nine basis points, or 0.09 percentage point, to 3.93 percent in the first two days of this week, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. The difference in yield between the London interbank offered rate, or Libor, widened seven basis points to 192 basis points.

The debt lost 1.3 percent in 2013, the HSBC/Nasdaq gauge shows, while emerging-market securities dropped 9.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Index.

Goldman Sachs set up a sukuk program based on a so-called commodity Murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland in October 2011. Goldman declined to provide any more details on the debt, it said in an e-mailed response to Bloomberg yesterday.

‘Think Twice’

In 2007, BLOM Development Bank SAL of Lebanon signed a contract with Investment Dar Co. to place a Wakalah deposit, where capital is raised to acquire assets that are entrusted to an agent. BLOM sued Investment Dar after the Kuwaiti company missed a payment on its deposit. Investment Dar contradicted its own scholars’ assessment and argued the financing from BLOM breached Shariah principles because Dar “was taking deposits at interest,” according to a court document.

The new Malaysian regulation would raise the standard of advice and level of services dispensed by religious experts, according to Mohamad Akram Laldin, a member of the Malaysian central bank’s Shariah Advisory Council.

“People will be more aware of their duties and responsibilities,” Akram said in an Aug. 15 interview in Kuala Lumpur. “This means that before they sign off on certain things, they will think twice.”

Editors: Andrew Janes, Sandy Hendry