Could Regulation Throttle Islamic Finance? Islamic Finance Markets around the World Adopt Very Different Approaches to Operating within the Diktats of Shariah Law Which, Some Experts Believe, Allows the Market to Flourish and Grow, Although Not All Agree
Kan, Charlotte, The Middle East
THE LACK OF A CENTRALISED, GLOBAL regulator in Islamic finance is a double-edged sword. On the positive side, it means financial institutions have a certain freedom in selling products as 'Islamic'--which has helped the industry prosper. On the other hand, it means those investing for ethical reasons may be misled in thinking some products are totally in keeping with the spirit of the Shariah.
In the wake of the 2008 credit crisis, regulation has stiffened in conventional finance. Islamic finance, however, still benefits from a much more relaxed regulatory framework, and there is at present no centralised regulator for this fast-growing sector. This results from several historical, cultural, geographical and economic factors.
A young industry
Islamic finance looks as if it is still in its infancy compared to conventional finance.
"The modern Islamic finance industry has only been around for 30 or 40 years, whereas conventional finance has been formalised for several hundreds of years to create a regulatory structure. Islamic finance is a young industry--with very ancient roots," notes Jonathan Lawrence, a finance partner who advises on Islamic finance transactions at law firm K&L Gates in London. "It's too young an industry to impose parameters on itself," Lawrence believes.
Also, the maturity of Islamic finance markets varies from country to country, with some markets well-established, as in the Middle-East and Malaysia, and others that are much more recent--for instance, some North African countries--which can prove challenging in terms of standardisation of regulation.
Another obstacle to central regulation is the religious, cultural and geographic mix that Islamic finance encompasses. "Standardisation of documents and structures would prove difficult, as there are different traditions within Islam with, for example, Shia and Sunni branches. The question is which traditions and which structures emerge," Jonathan Lawrence says.
Spanning several continents and Muslim traditions makes it difficult indeed to implement a regulatory framework that would fit all. For instance Shariah compliance in countries like Malaysia or the UAE is considered to be more liberal than in places like Saudi Arabia.
Guidelines with no enforcement
Currently regulation is divided between standard-setting bodies and scholars.
The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was created in 1991 to issue international standards on accounting, auditing and corporate governance. It has 200 members from 45 countries, including central banks, Islamic financial institutions, and other participants in the Islamic banking and finance industry.
In 2003, another regulatory body was established with the support of the IMF by central banks and the Islamic Development Bank: the Malaysia-based Islamic Financial Services Board (IFSB). Its mandate is to "promote and enhance the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors". The 189 members of the IFSB comprise 53 regulatory and supervisory authorities, eight international intergovernmental organisations and 128 market players, professional firms and industry associations operating in 44 jurisdictions.
Finally in 2010, the International Islamic Liquidity Management Corporation (IILM) was established by central banks, monetary authorities and multilateral organisations to create and issue short-term Shariah-compliant financial instruments to facilitate effective cross-border Islamic liquidity management.
For all their worth in trying to provide standards for the industry, these bodies only issue guidelines, there is no mandatory element to it. …