FNB's Islamic Finance unit has suffered a setback after its sharia board quit, bringing the unit's sharia compliance credentials into question.
The dispute between FNB and the sharia board overseeing its Islamic Finance unit has highlighted some of the difficulties of trying to accommodate two inherently different systems of banking in one financial institution.
Last week the sharia board of FNB Islamic Finance resigned citing an "untenable breakdown in trust". Board chairperson Mufti Ebrahim Desai said the board could not vouch for FNB's Islamic Finance products.
"Those products that we had endorsed will remain valid for as long as there are no changes. However, as we no longer supervise the implementation, we cannot endorse the same," he said.
Desai told the Mail & Guardian that there had been ongoing difficulties between the board and bank officials, since news emerged of wrongdoing within the unit towards the end of last year.
In January, the M&G reported on the shake-up at FNB's sharia division, which was rocked by claims of misappropriation of funds, conflicts of interest, unfair labour practices, and mistreatment of staff, board illegitimacy and fraud.
Ebi Patel, the former head of the division, was put on special leave while an internal investigation was conducted. It found internal breaches of operational procedure and corporate governance failures, and documents showed that special deals were worked out for friends and family.
Patel was reinstated but faced disciplinary action. When Patel tendered his resignation from the company in June, the bank denied that the move was linked to the investigation and said he was retiring "for personal reasons".
Patel was replaced by Amman Muhammad, former MD of Absa Islamic Banking, at the beginning of the month.
Desai said the bank had "showed they regarded the sharia board with total disdain and … had lack of trust in us" and that it had violated an undertaking to consult with the board on appointments within the unit.
"This is not a matter of us interfering with governance issues, we needed to know who would be there because that's the type of person we'd be working with."
On Friday, FNB moved to reassure its Muslim customers that the termination of its sharia board's services did not invalidate its sharia certification.
It said it had "mutually terminated" the services of its three-member sharia board as the parties had "differing views of the role of the board in the operational management of the business".
The bank has set up a sharia supervisory compliance oversight committee to fill the gap until it can reconstitute a permanent sharia board.
It reassured customers that the termination of the sharia board's services in no way altered the compliance of its existing products and services, or the validation of its sharia certification.
The Muslim Judicial Council's Moulana Taha Karaan said the incident had raised eyebrows in the Muslim community.
"People would like some clear answers as to what's happening," he said.
"Unfortunately the statements released tend to create the impression that sharia compliance might be at stake."
Karaan, however, said there was no need for panic.
"The next few months will show us whether the new board or management seeks to change things in the product structure. At this moment … they're doing the same deals they used to do before, in terms of contractual structures," he said.
"Sharia-compliance of the products is not at stake."
Meanwhile, Stuart Grobler, chairperson of the Banking Association's committee for Islamic banking, said integrating Islamic banking into conventional banks can be complicated.
"The difficulty for an organisation like [banks] is that they have a normal managerial hierarchy or accountability, and then across that you impose this sharia board which you would comprise of certain scholars, muftis or imams, who are not necessarily business oriented. But they are the final arbiter of what is sharia compliant, so every financial component or every deal is approved by the sharia board," he said.
"You can imagine how that would affect management prerogatives, accountability and responsibility."
Sharia law requires an "underlying asset", so transactions cannot be paper-based. Islamic bankers may also not invest in companies that are too highly leveraged or earn a disproportionate amount of revenue through interest.
Muslims may not use interest so any interest accrued through conventional banking systems is usually donated to charity. However, if a Muslim invests in a sharia compliant bank or financial product, the returns on an investment are derived through alternative mechanisms, and they can use the proceeds.
Islamic banking has been identified by national treasury as one way to attract investment from Islamic countries, particularly in the Middle East, and processes are in place to create a regulatory framework that would facilitate this.
In December last year national treasury invited banking institutions to submit proposals for the provision of advisory services for the structuring and issuance of a government Islamic bond, known as a "sukuk" in local and international markets.
The evaluation of the bids has been completed and a consortium comprising Standard Bank, Liquidity House, Nova Capital, BNP Paribas, Albaraka and Regiments Capital has been appointed to set up a programme and issue a debut sukuk on behalf of the Republic of South Africa.