Endowment RFP: SSB Governance, Standards Conflict and Leverage
A Gulf-based endowment issues an RFP for a $120 million global Shariah-compliant equity mandate. The RFP requires AAOIFI Shariah Standards, an independent Shariah supervisory board (SSB) with three members, and annual purification. The endowment's local regulator, however, caps non-compliant income at 5% of gross revenue and requires purification at the holding level, whereas the manager's draft policy uses a 7% cap, purifies at the portfolio level, and relies on a single in-house Shariah reviewer. The draft also proposes a 10% murabaha-based leverage facility to manage liquidity, and a conventional money market fund for the 3% cash buffer. The client's SSB has not yet reviewed the proposal. Two SSB members are also board members of a sukuk issuer held in the portfolio. The RFP deadline is in three weeks. The manager wants to submit the draft unchanged to avoid delays.
1. Identify the three most material governance defects in the draft RFP response and explain why each matters for a Shariah-compliant mandate.
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The most material defect is the SSB architecture. The RFP requires an independent three-member SSB, but the draft relies on a single in-house reviewer. That fails the client's governance requirement and removes the fatwa-issuing body that must approve screening, purification and leverage. Second, the draft's 7% non-compliant income cap and portfolio-level purification conflict with the regulator's 5% cap and holding-level purification. A lower cap and holding-level purification are more conservative; the manager cannot rely on its own policy where the client's regulator imposes a stricter rule. Third, the 10% murabaha leverage and conventional cash fund introduce riba and gharar exposure that the RFP did not authorize. Liquidity management may be permissible through Islamic alternatives, but the draft assumes a facility without SSB approval. The SSB affiliations add a conflict: two members linked to a portfolio sukuk issuer cannot objectively approve related-party holdings. The manager should not submit unchanged; it should re-paper governance, map standards, and obtain client SSB approval before the deadline.
2. The client's local regulator and AAOIFI requirements conflict. How should the manager resolve the conflict in the RFP response, and what should be disclosed?
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The manager should apply the stricter of the two regimes rather than choosing the more convenient standard. Operationally that means a 5% non-compliant revenue cap, holding-level purification, and a documented mapping between AAOIFI standards and the local regulator's rules. The RFP response should include a compliance matrix showing each requirement, the manager's policy, and the source standard. Where AAOIFI permits a higher threshold but the regulator does not, the manager should state that it will follow the regulator for this mandate and explain that the client's SSB may impose additional restrictions. Portfolio-level purification should not be used to net compliant and non-compliant holdings; the manager should calculate and purify at the holding level, then report the aggregate. The response should also disclose that a conventional money market fund is not acceptable and that any cash buffer will use an Islamic liquidity vehicle approved by the SSB. If the client wants AAOIFI-only treatment, the manager should request a written waiver from the regulator or decline the mandate.
3. What should the manager do about the two SSB members affiliated with a portfolio sukuk issuer and about the proposed murabaha leverage and conventional cash fund?
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The affiliated SSB members should recuse themselves from any deliberation or vote on the sukuk issuer and on any transaction involving that issuer. The manager should disclose the affiliations in the RFP response, document the recusal, and ensure that the remaining SSB members or an independent reviewer can form a quorum. If the client's rules require a three-member SSB and two are conflicted, the manager should propose an ad hoc independent member or obtain client SSB approval for the process. On leverage, the manager should withdraw the 10% murabaha facility unless the client's SSB expressly approves it and the facility is structured without riba, with clear asset backing and no penalty interest. Leverage also increases risk and may breach the client's mandate even if Shariah-compliant. The conventional cash fund should be replaced with a Shariah-compliant liquidity vehicle, such as a commodity murabaha or an Islamic money market fund, and the SSB should approve the counterparty and structure. These changes should be completed before submission, not left as post-award conditions.