A branch of Sharjah Islamic Bank. The lender, which is rated BBB+ by S&P, may price its sukuk at a yield of about 5.5 per cent. Image Credit: Atiq Ur Rehman/Gulf News Archive

Dubai: One of the most overused words in Islamic finance is consolidation.

Islamic banks, leasing companies and Takaful companies need to consolidate to reach size and achieve scale. As large capitalised entities, they can better compete with not just the Islamic windows and subsidiaries of conventional banks and insurance companies, such as HSBC or Prudential, but eventually the larger conventional financial institutions for mandates on project finance, mergers and acquisitions, buyouts and so on.

But what about consolidation among Islamic industry bodies, such as AAOIFI (Accounting and Auditing Organisation of Islamic Financial Institutions), IIRA (International Islamic Rating Agency), IIFM (International Islamic Financial Market) and CIBAFI (General Council for Islamic Banks and Financial Institutions)?

Consolidation makes sense when the need of the hour is an industry body that sees the bigger picture and where they fit in as an important stakeholder in Islamic finance versus the present ‘silo' approach.

Founding stakeholders

There is an overlap among the founding shareholders of the above-mentioned industry bodies that includes heavyweights of Islamic finance such as Islamic Development Bank (IsDB), Al Rajhi, Albaraka and Kuwait Finance House (KFH). Islamic finance was conceived and launched between 1991 (AAOIFI) and 2005 (IIRA). But the times have moved on and the bodies need to stay relevant.

According to IIRA's website, it is the sole rating agency established to provide capital markets and the banking sector in predominantly Islamic countries with a rating spectrum that encompasses the full array of capital instruments and speciality Islamic financial products, and to enhance the level of analytical expertise in those markets.

Currently IIRA does not have the experience, size and reach to compete with established rating agencies involved in Islamic finance, such as Standard & Poor's, Moody's or Fitch. More importantly, is there any point in reinventing the rating ‘wheel,' when the rating agencies understand quite well the various risks associated with sukuk contracts, Islamic funds, Islamic banks and others?

IIRA may need to look into the process of Sharia adherence of Islamic banks, Takaful, leasing, iREITs and even Islamic stock exchange, such as DFM. The focus on process may address one of the important issues in Islamic finance, the non-compliant Sharia risk.

According to the IIFM website, it is the global standardisation body for the Islamic Capital and Money Market segment of IFSI. Its primary focus lies in the standardisation of Islamic financial products, documentation and related processes.

IIFM standardised documentation in an inclusive manner with industry practitioners while working and partnering with established conventional institutions, such as ISDA.

Would it make more sense for IIFM to work under the umbrella of an industry setting body that produces standards requiring standardisation?

The CIBAFI chairman talked about the agency's major roles in its website:

Support the industry through awareness and training, holding conferences, seminars and forums and providing the necessary information. Protect the industry so as to avoid, as much as possible, the obstacles and deviations in the course of the Islamic finance industry.

Prominent institutions

Currently there are more prominent institutions, universities and for-profit initiatives offering Islamic finance certification courses, training, seminars and conferences than when it was conceived. There are many Islamic finance conferences, including Euromoney in London, IIFF in Dubai, and KLIFF in Malaysia that have workshops before and after the conferences.

Would it not make more sense to bring CIBAFI under the umbrella of an industry body that produces standards that are followed by training, seminars, and workshops?

Finally, one of the most prominent Islamic finance industry bodies in GCC is AAOIFI, with over 80 standards and nearly 200 members from 40 countries.

AAOIFI website talks about its mission:

(It) is an Islamic international autonomous not-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry.

But why only a handful of jurisdictions have mandatorily adopted the AAOIFI standards, including Bahrain, DIFC, Jordan, Lebanon, Qatar, Sudan and Syria? Has AAOIFI lost focus of its core mandate on accounting, auditing, ethics, governance and Sharia standards for Islamic finance to areas, such as stock screening for Sharia-compliant companies?

Working together

AAOIFI is best positioned to be the umbrella Islamic finance industry body in GCC as its standards become standardised documents (IIFM) with process review (IIRA), and promoted and protected with the understanding (CIBAFI).

It is similar to a four-by-four Olympic relay race where much work is done together before the race, and at the event, the baton is seamlessly passed from one body to the next.

There could be one Islamic finance conference with all four bodies in various Islamic finance hubs to educate and demystify.

Looking forward, after AAOIFI "acquires and integrates" there needs to be discussions for a merger of equals with Malaysia-based IFSB (Islamic Financial Services Board).

The chairmen of these industry bodies need to put aside their egos for a bigger cause: to promote and protect Islamic finance under one industry body.