Dubai/Kuala Lumpur: Wrangling among scholars and wiggle room in interpretation of Sharia principles threaten to derail any attempt to arrive at global standards in Islamic finance, holding back the $1 trillion (Dh3 trillion) industry.
Analysts say that unified rules that could have fuelled growth will be difficult to establish given the differences not just between regulators but also between practitioners. Many global Islamic finance institutions currently look towards guidelines set by Accounting and Auditing Organisation for Islamic Financial Insitutions (AAOIFI) but there is no way to force banks or the Sharia boards to comply in all cases.
Enforcement power
"By default, we expect Sharia scholars at individual banks to stick to the standards we have issued but there is always the possibility that people can deviate," said Mohammad Nedal Alchaar, Secretary General of AAOIFI. "We just don't have the enforcement power."
A series of high-profile defaults and a legal battle over the Sharia compliance of a contract between Kuwait's Investment Dar and Lebanon's Blom Bank have raised calls for standardisation, particularly as Western markets that are used to more regulation eye entering Islamic finance.
Blom sued Investment Dar in a British court last year to receive its principal and a fixed return promised in its contract with Dar. Dar declared the deal void despite its own Sharia board approving the structuring, saying that under Sharia, a return could not be guaranteed because there was no risk-sharing.
One Gulf-based Islamic banker said that there was "real concern" among the conventional banks over the absence of an authoritative centralised body to frame rules. "Islamic finance was originally about establishing an Islamic economy but we don't even have synergy between banks in Malaysia and the GCC (Gulf Cooperation Council)," he said.
Standardisation bodies do exist but the adherence to their standards varies from country to country.
AAOIFI has 41 accounting and governance guidelines for Islamic financial institutions. Individual regulators in Bahrain, Qatar, Syria and Sudan made the standards mandatory for Islamic financial institutions but they are merely considered advisable in countries such as Malaysia, Saudi Arabia and the United Arab Emirates.
"There is cognisance that if Islamic finance is to grow between the Middle East and particularly Malaysia, there needs to be more dialogue and more consensus of how we can work together," said Ariff Tun Dr Esmail, associate director at Maybank Investment.
Islamic finance is a $1 trillion global industry but ratings agency Moody's forecasts that the industry could hit $5 trillion over time.
In Malaysia there is a national Sharia Council that sets rules for Islamic financial institutions. But Mal-aysian interpretation of Sharia is considered to be more liberal than the views of Saudi Arabian scholars, making it difficult to reach consensus on deals between the two nations.
Tawarruq, where an asset is sold to a purchaser with deferred payment terms and the purchaser then sells the asset to a third party to get funds, has sparked debate among scholars over its Sharia-compliance. The International Council of Fiqh Academy in Saudi Arabia declared tawarruq impermissible last May, calling into question deals in a market estimated to be worth over $100 billion.
