Global certificates for Islamic securities eyed

Published: Tuesday, 15 April, 2008, 01:40 AM Doha Time
DUBAI: Religious scholars who set standards for Islamic securities plan to start issuing a global compliance certificate to eliminate breaches of Muslim Shariah law and make the securities more attractive to investors.
Bonds, loans and bank accounts will be among financial products vetted for approval by the Bahrain-based Accounting & Auditing Organisation for Islamic Financial Institutions’ board of advisers, Secretary General Mohamed al-Chaar said in an interview in Dubai yesterday.
“It will give Muslim and Western investors confidence the products they’re buying in Bahrain or Malaysia or the US all meet common standards of compliance,” al-Chaar said.
“The AAOIFI stamp will bring global homogeneity, boosting investments’ credibility and investor acceptance.”
Demand for investments that comply with Islam’s ban on interest has increased as oil money floods into the Arabian Gulf. The global Islamic finance industry’s assets under management are expanding by 15% a year and may have topped $1tn, according to the Malaysia-based International Islamic Financial Services Board.
Investors bought $30bn of Islamic bonds in the past year, using contracts such as Ijarah leases and Murabaha sale-and-repurchase transactions to avoid interest, data compiled by Bloomberg show. Without globally accepted standards, Islamic banks and their clients rely on compliance rulings by recognised Shariah scholars to sell products and securities to devout Muslims.
AAOIFI’s board of 18 scholars, led by chairman Sheikh Mohamed Taqi Usmani, said in February as much as 85% of Islamic bonds sold to date may not fully comply with the precepts of Shariah. The board last month published tougher rules for the securities, known as sukuk, to iron out “blemishes” that it said had crept into some transactions.
Usmani and colleagues including Sheikh Mohamed Elgari and Sheikh Nizam Yaquby advise banks including HSBC Holdings, Citigroup and BNP Paribas, according to HSBC. Working with these scholars, banks have built the market for sukuk to $60bn from almost nothing a decade ago, Bloomberg and Standard & Poor’s data show.
After initial talks this month, 16 banks from countries including the US, Canada, South Africa and some Gulf states want to have new products certified, al-Chaar said, declining to name them. AAOIFI aims to start certifying this month and will provide the service at cost because it is a non-profit organisation, he said.
Fees start at $2,500 for a current or savings account, rising to 0.1 percentage point of an Islamic bond sale with a minimum fee of $7,000, according to documents al-Chaar provided to Bloomberg today. If AAOIFI’s scholars reject a contract, lower fees apply for resubmission once changes have been made, the notes show.
Islamic banks will still need to retain their own board of scholars who vet all their products, al-Chaar said. Conflicts will probably be rare since AAOIFI’s scholars also work for a large number of Islamic banks, he said. – Bloomberg

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