Dhimmitude at it’s best. Do these companies even understand Shariah Law? Is making money the only priority?
comments by Allyson Rowen Taylor
Braxxon attends World Islamic Banking Conference
Islamic financial services are today provided by a range of types of institution, from “pure” Islamic banks, typically operating out of the Middle East and South-East Asia and owned by investors from that region, to “Islamic Windows” operated by large conventional banks and offering both retail and wholesale products. Both types of institution are playing their part in fuelling the growth of the sector, but a recent significant development has been the rapid expansion in the number of Islamic Banks established in Western financial centres, particularly London. The benefits of London as a centre for Islamic Finance were promoted at the conference through a UK Pavilion organised through UKIT (UK Trade and Investment).
The dominant themes for the conference were expressed in the opening keynote speeches from the Central Bank Governors of Bahrain, Indonesia and Pakistan. The key challenges to be faced in order for Islamic Finance to break out of its niche to become a significant force in global financial markets were seen as:
• The need for greater standardisation – of products, accounting treatment, and interpretation of Shariah law;
• The current shortage of skilled staff, particularly of Shariah scholars to sit on the Shariah Boards required by “pure” Islamic Banks;
• Development of deeper and more liquid secondary markets in Islamic Capital Markets products such as Sukuk, which today are typically bought and held as long term investments.
Of these, the standardisation issue is probably the biggest, and certainly the most controversial, challenge. Interpretations of Shariah law, and therefore of whether a particular product is Halal (permitted), vary between the Middle East and South-East Asia and, given that each institution has its own Shariah Board to rule on these questions, between banks in the region. Just recently, a scholar on the Board of AAOIFI (the Bahrain based Islamic Finance standards body) declared that most Sukuk bonds issued to date are not truly Shariah compliant, and a review and a ruling are expected on the issue early in 2008.
The pace of innovation, in the search for Islamic equivalents of the financial instruments routinely used by conventional banks for investment and risk management purposes, is accelerating. Islamic Finance is based on the principles of ethical investment, prohibition of Riba (interest), and prohibition of speculative transactions not linked to trade in real goods. Innovation, and some degree of flexibility in the interpretation of Sharia, are pushing the boundaries of what is permitted, and a number of speakers cited innovation as one of the key drivers of growth but one sounded a note of caution. “Are we emphasising form over substance, and allowing the system to kill the idea – of ethical and socially responsible banking?” A debate that is likely to run for some time yet!