Dubai: At the International Islamic Finance Forum, under the patronage of His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice- President and Prime Minister of the UAE and Ruler of Dubai, an important issue was raised: does Islamic finance need development indicators that could provide a pulse of health and direction of the industry?

Financial ratios, research and analyst reports, Islamic ‘economic' indicators, etc., are for another day.

The credit crisis' collateral impact on Islamic finance has flushed out the need for data/index and development indicators, acting as a barometer for a possible local financial tsunami brewing or impact of an external financial eruption. There are 300-450 Islamic financial institutions spread over 75-90 Muslim and non-Muslim countries, but how do we capture the pulse of this fragmented industry?

The beginning premise is that Islamic finance operates in the same interest-based macro-economy, hence, at one level, the country econ-omic indicators on consumer sentiment, interest rate benchmarks, stock market performance, currency valuation, inflation, regulations, etc., are the same.

But, Islamic finance needs a deeper dive from that "same" base for better understanding of the indicative "pulse and direction."

Let's look at development indicators that the "man on the Islamic street" can relate to better. Development Indicator for Islamic finance (DIIF) may be broken down to four areas: Product and platform pronouncements; Industry happenings; Country comments; and Withdrawals and liquidation.

In pronouncements we read press releases on product and platform launches like Islamic hedge funds, Exchange traded funds, multi-asset trading platforms, cell phone airtime as underlying basis for Murabaha, money market and sukuk funds, etc. Is this creating a need, then fulfilling the demand?

It is said Islamic finance is 6-18 months behind conventional finance, hence, is the latter's past used, as ‘research,' for former's present offerings?

Local demand

In industry happenings, there are fewer Islamic finance conferences in GCC, but an increasing number of such events in Russia and CIS, Africa, EU, implying demand to tap the petro liquidity for funding growth and address local demand.

As interest in Islamic finance grows globally, we are seeing more Islamic finance media being launched, frequent articles in western media like Wall Street Journal, Financial Times, Reuters, diploma and certificate courses, increase in membership in industry bodies like AAOIFI, announcement of Islamic bank conversions, subsidiaries and windows, law firm Islamic finance practice established or expanding, a more precise indicator as the industry is about understanding regulations and documentation.

For country comments, it is one thing for non-Muslim countries like Singapore, Hong Kong, Korea, the UK, France, Luxembourg, etc., to plant the flag of Islamic finance when price of oil is above $50 (Dh183.5) a barrel, but is there an enabling environment, that is, level playing field, grants for training people and local scholars? For example, are there trust and SPV laws, tax neutrality, etc., that may encourage sukuk issues?

For Muslim countries embarking on Islamic finance, assuming political issues addressed, regulations, consistent with the country's level of economic development, is the starting point, but bottlenecks include scholars, trained human resource, risk management, etc.

The introduction of Islamic finance in sub-Saharan African countries and Commonwealth of Independent States (CIS) will present an important test case.

The challenges are, what is message to the market place when:

Sukuk default/restructure: is this a credit issue or something more?

  • Struggling Islamic bank, Investment Dar, repudiates contract under guise of Sharia: Presents a reputation risk to Islamic finance?
  • Islamic fund liquidated: performance issues or large investor withdrawal?
  • Islamic bank reduce operations, Islamic Bank of Asia: business model not working or impact of credit crisis?
  • Industry bodies cooperating: Should IFSB be part of AAOIFI conferences, as the latter attracts almost all the scholars?

Islamic finance needs to have its own authentic indicator for measuring not only health and direction, but also early warning signs.

Imagine BBC World News Anchor saying, "... GCC business confidence index declined sharply in 2010, and corresponding TR Islamic business confidence was up 2 per cent."

The writer is Global Head of Islamic Finance, Thomson Reuters. Views expressed in this column are of the writer and cannot be attributed to his organisation.