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Sukuk Roadblocks May Rise With National Shariah Boards: Islamic Finance

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By Khalid Qayum and Dana El Baltaji – Oct 28, 2010 7:38 PM GMT+0800 Thu Oct 28 11:38:07 GMT 2010

Points of Essence:

  • The AAOFI-led National Shariah Board plan to oversee Sukuk sales may face resistance from the Islamic finance practitioners even before its inception saying that would create another layer of bureaucracy as there has been sufficient regulation to monitor Sukuk. This will according to them stifle the growth of Sukuk and hamper its evolution speed
  • AAOFI insisted that the Board will play a pivotal role in synchronizing and standardizing the sukuk regulations with the international standards which in turn may help clarify standards and bolster investors’ confidence in the Sukuk industry.

The plan to create national Shariah boards to oversee sukuk sales is drawing criticism from bankers and lawyers who say the groups would increase bureaucracy in the $1 trillion Islamic finance industry.

The Accounting & Auditing Organization for Islamic Financial Institutions, a leading global regulator, is in the final stages of a plan recommending governments appoint panels of scholars and experts at the national level to rule whether products comply with the religion’s tenets, Mohamad Nedal Alchaar, secretary-general of the Manama, Bahrain-based body, said in an interview in Kuala Lumpur on Oct. 26. The proposal will be submitted early next year, he said.

The regulator says such a system will help clarify standards and bolster investor confidence in an industry whose assets are forecast by the Kuala Lumpur-based Islamic Financial Services Board to almost triple to $2.8 trillion by 2015. The changes risk adding bureaucratic hurdles and slowing approvals at a time when sales are down 19 percent this year, according to CIMB-Principal Islamic Asset Management Sdn. and Atlanta-based law firm King & Spalding LLP.

Further regulation may just add another “layer of bureaucracy,” Jawad A. Ali, global deputy head of the Islamic finance practice at King & Spalding, said in an interview in Kuala Lumpur on Oct. 26. “I believe it would slow down the development of Islamic finance and render it uncompetitive.”

Shariah Advisory

In Malaysia, the world’s biggest market for sukuk, the Shariah advisory council, ensures consistency and it is helpful in creating certainty in the market, Ranjit Ajit Singh, managing director at the Securities Commission in Kuala Lumpur, said in an interview yesterday.

“We have enough regulatory framework,” within the Securities Commission, Noripah Kamso, chief executive officer at CIMB-Principal Islamic Asset in Kuala Lumpur, said in an interview yesterday. The AAOIFI proposal is “going to destroy the speed of evolution” within the industry, she said.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, have dropped to $12.8 billion so far this year, according to data compiled by Bloomberg. Borrowers from Malaysia raised 20.7 billion ringgit ($6.7 billion) in the period compared with 26.2 billion ringgit a year earlier, the data show.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 has climbed 13 basis points to 2.6 percent this week, prices from Royal Bank of Scotland Group Plc show. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s has narrowed 7 basis points to 380, according to data compiled by Bloomberg.

Industry Standardization

AAOIFI, which has 200 members, sets accounting and auditing standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria, according to its website. The agency said its guidelines have also been used to help frame policy in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa.

The organization’s proposal is “a move toward standardization of the industry,” Alchaar said in an interview in Kuala Lumpur on Oct. 26. “Shariah advisory boards of institutions will still be there and they will create and innovate products that are approved by a single body, creating comfort in the market.”

Sukuk returned 12 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Bonds in developing markets gained 16.1 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. Islamic bonds in the Persian Gulf returned 12.3 percent, the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows.

Positive Development

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 14 basis points this month to 359 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Islamic institutions typically have their own panels of scholars who give legal judgment, or fatwas, to determine that products comply with Shariah principles. AAOIFI’s Alchaar said in August that a shortage of experts means they tend to sit on a number of advisory boards simultaneously, increasing the risk of conflicts of interest.

“Anything that can increase international synchronization and standardization can only be positive,” Omar Shaikh, a member of the Shariah board the Glasgow-based Islamic Finance Council U.K., an adviser to companies and governments on Shariah finance, said in a telephone interview in Dubai yesterday. It’s a matter of “how you execute that against the various jurisdictions,” he said.

Pakistan Sukuk

The International Islamic Liquidity Management Corp., being set up by eleven central banks, will sell the first of its short-term bills in dollars and the next in euros, Malaysian central bank Governor Zeti Akhtar Aziz said in Kuala Lumpur today. Issuances will “facilitate greater investment flows,” the Kuala Lumpur-based Islamic Financial Services Board said in an e-mailed statement on Oct. 25.

Pakistan has a Shariah advisory council, which has provided regulations for Islamic finance that institutions follow in developing their products, Saleem Ullah, director of Islamic banking at the State Bank of Pakistan, said in an interview in Kuala Lumpur yesterday.

The Karachi-based central bank will sell 40 billion to 50 billion rupees ($582 million) of three-year sukuk in the domestic market this week, Ullah said.

“The advantage of a national Shariah board is that you will have total standardization,” he said.

Source: Bloomberg


Written by Suapi Shaffaii

October 29, 2010 at 3:04 pm

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