Dubai can benefit from Sharia standard for gold

As the international market development organisation for the gold industry, we are committed to ensuring consumers and institutions can benefit from gold’s unique properties as a financial asset.

These properties have long been recognised within conventional finance — it is an important tool for managing financial risk and volatility, and gold helps preserve capital over time. Gold has outperformed all major currencies in the long run since the early 1900s.

The highly liquid nature of the gold market (more than $200 billion [Dh734 billion] of gold is estimated to be traded daily in the London market alone), its lack of correlation with other asset classes, the absence of credit risk, and its diverse sources of demand, make it a unique asset for diversification and risk management.

Gold has historically played a significant role in the Islamic world, but due to a lack of Sharia consensus there has been uncertainty on which gold products can and cannot be used in Sharia finance, and which gold products are compliant and which are not. To bring the full benefits of gold to the Islamic finance industry, we have been working with the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) on the development of an internationally-recognised Sharia standard on gold.

A draft standard was launched at the end of last year and was subject to an initial round of industry consultation, including two industry seminars held in Dubai and Kuala Lumpur. What was clear from these seminars and the consultation exercise is that there is overwhelming demand for gold to play a greater role in Islamic finance. Following the initial consultation exercise, AAOIFI formed a Sharia sub-committee on gold — based in Dubai — to take on the Standard’s development.

We are collaborating with AAOIFI to develop the standard as it is the premier international Sharia-standard setting agency, and its standards are adopted in their entirety or are heavily influential through most of the Islamic world. AAOIFI’s Sharia standards help harmonise guidance, and give issuers and investors confidence in the Sharia treatment of the products they are developing or are investing in.

Standardised guidance across jurisdictions improves the transparency and coherence of Islamic banking principles. This makes Sharia-compliant products more commercially viable by opening them up to a bigger international market. For these reasons, we are confident that a Sharia standard on gold, endorsed by AAOIFI, will make a meaningful contribution to the growth of gold in Islamic finance, supporting the region’s economic growth.

The standard is currently under development and will be subject to a final round of wide-reaching industry consultations before it is launched later this year. Our discussions with industry participants signal that it will act as a major catalyst for the development of a broad range of Sharia-compliant gold products such as gold accumulation plans and physically-backed gold ETFs. And we will be working with Islamic finance institutions worldwide on the launch and development of these new gold products.

A larger role for gold in Islamic finance will bring greater choice to consumers, will increase the diversity of Sharia-compliant assets (which in itself contributes to wider financial system stability), and help grow the overall size of the industry. As Islamic finance grows — some predict that the industry will grow to $4 trillion by 2020 — it is important that this growth is matched by a greater range of Sharia-compliant financial solutions.

In conventional finance the benefits of investing in gold have long been recognised. A sharia standard on gold will bring these benefits to the world of Islamic finance. As a major gold hub and international financial centre, Dubai could benefit more than most.

The writer is Managing Director, Central Banks and Public Policy, World Gold Council.