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Wednesday, 17 October 2012

Islamic Finance Rules Edge Forward Amid 5-Year Impasse

After at least five years of delays, Islamic finance experts in Saudi Arabia and Malaysia are renewing efforts to create common regulations for scholars.

Malaysia’s International Shariah Research Academy for Islamic Finance is working with its Middle Eastern counterpart on guidelines that will address the number of boards on which scholars can sit to reduce conflicts of interest, according to Executive Director Mohamad Akram Laldin in Kuala Lumpur. An institution will also be established to provide global accreditation, said Akram, who helped set up a body last year to oversee advisers’ activities in the Southeast Asian nation.
The industry needs such measures to boost confidence and improve transparency, Abas A. Jalil, Kuala Lumpur-based chief executive officer of Amanah Capital Group Ltd., said in an interview yesterday. Discussions have faltered in the past because of Persian Gulf experts’ more stringent interpretations of Shariah law, which could still hinder progress, he said.
“The main challenge is to get everyone on the same page,” Abas, who has helped form Islamic funds in Bahrain and Kazakhstan, said. “Scholars in Malaysia are more liberal. In the Middle East, their products focus mainly on local investors so they don’t mind not being flexible.”


In most countries there’s no limit to the number of entities to which a scholar can advise on Shariah compliance, Akram at Malaysia’s academy, said in an Oct. 10 interview. To avoid conflict of interest in the Southeast Asian nation, the central bank doesn’t allow Islamic experts to sit on more than one board involved in the same business.
The new rules being worked on in conjunction with the Islamic Research & Training Institute in Jeddah, Saudi Arabia, will also determine if religious scholars can own shares in companies they advise and govern the disclosure of information relating to products they help structure, Akram said.
“A universal Shariah governance framework will enhance competitiveness and growth of Islamic financial institutions,” Abdul Rahim Abdul Rahman, a scholar who advises HSBC Amanah Malaysia Bhd. in Kuala Lumpur, said in an Oct. 14 e-mail. “Shariah governance will ensure the achievement of accountability toward stakeholders.”
The $1.3 trillion global Islamic finance industry is seeing annual average growth rates of 15 percent, Malaysia’s Securities Commission said in a June 27 statement. The proposed regulations from the two academies come as sales of Shariah-compliant debt, which pays returns on assets to comply with Islam’s ban on interest, climbed to a record in the six-member Gulf Cooperation Council, which includes Saudi Arabia.


Issuance in the GCC rose four-fold to $19.2 billion in 2012 from a year earlier to account for 49 percent of the $39.1 billion worldwide, which is also an all-time high, according to data compiled by Bloomberg.
Global Islamic bonds returned 8.1 percent this year, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows, while debt in emerging economies gained 16 percent, according to JPMorgan Chase & Co.’s EMBI Global Composite Index.
Average yields on sukuk fell five basis points last week to a record low of 2.92 percent, after dropping 42 basis points in the July-to-September quarter, according to the HSBC/Nasdaq index. The difference between the average and the London interbank offered rate, or Libor, narrowed one basis point, or 0.01 percentage point, to 195 basis points.


The Bloomberg-AIBIM Bursa Malaysia Corporate Index, which tracks 57 local-currency sukuk in the world’s biggest Islamic debt market, gained 0.5 percent last week to 101.085. It reached an all-time high of 101.1963 on Sept. 26.
The proposed guidelines would strengthen an industry which now has varying degrees of supervision for religious experts, Megat Hizaini Hassan, partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an e-mail yesterday.
Engku Rabiah Adawiah Engku Ali, a scholar who sits on Bank Negara Malaysia’s Shariah Advisory Council in Kuala Lumpur, said in an Oct. 12 interview that a more robust framework would reinforce the public’s trust.
Islamic experts versed in Shariah law are generally required to have recognized university degrees before they can act as advisers to banks and companies. A shortage of trained personnel means they tend to sit on a number of advisory boards simultaneously.
“Some Islamic Scholars with the highest qualifications from top religious schools do not have a good knowledge of economics and financial products, yet they sit on various boards because of their influence in the Islamic world,” Amanah Capital’s Abas said.


Mohammad Daud Bakar, a scholar who heads Bank Negara’s Shariah committee also sits on boards of Malaysia’s Securities Commission, Islamic Bank of Asia Ltd., BNP Paribas SA and Noor Islamic Bank among others, according to the institutions’ websites.
Mohamed Ali Elgari, an expert in Kuala Lumpur, holds positions on boards including those of HSBC Amanah Malaysia Bhd., Islamic Bank of Asia, National Commercial Bank, and Abu Dhabi Islamic Bank PJSC, the lenders’ websites show.
Islamic markets would benefit from rules overseeing scholars although it could be a challenge to create a set of guidelines that are applicable worldwide, according to Hong Kong-based law firm Norton Rose.
“Scholars operate on a global basis and it is very difficult to create regulations and systems which apply across borders,” Davide Barzilai, a partner with Norton Rose, said in an e-mail yesterday. “Scholars are self-regulated by the market and of course by their own conscience and Shariah.
(Bloomberg Business Week / 15 Oct 2012)
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