Standardisation has to wait

Emirates Business 24/7 :Standardisation in Islamic finance will not materialise in the near future, a top official from Dubai Group said.

"I don't think it [standardisation] is possible and I don't think this will happen in the near future, that is for sure," Dr Ahmed Al Janahi, deputy group CEO of Noor Islamic Group, told Emirates Business. "Technically, Islamic principles do not encourage a common treatment of views. It is not socialism. The principles are the same," he added.

Abdulrazaq Aljassim, CEO of Dubai Insurance Group, a sister company of Noor Islamic Group, on the other hand expressed a different view, saying Islamic finance is "getting close" to standardisation.

"There are challenges," Aljassim said. "Malaysia is operating in slightly different Shariah principles. But there is more and more convergence and there are serious initiatives in standardisation. Shariah scholars are already trying very hard to see eye to eye."

Oliver Wyman, a global strategy consulting firm, estimates around $300 billion (Dh1 trillion) of assets are currently being managed under Islamic principles. The Financial Services Authority in the UK suggested it was, in fact, as big as $500bn.

According to Islamic finance analysts, while the Islamic business is growing by the day, it faces hurdles from lack of standardisation and homogeneity.

Because there is no single interpretation of Islamic law, each financial institution has a board of religious scholars who determine which products are Islamic – and what one bank considers Shariah-compliant may be unacceptable to another.

To further establish a common ground, the Dubai International Financial Centre will be launching a research project that will study the standardisation of Islamic finance by the end of this year, Nasser Al Shaali, of Dubai International Financial Centre, told this newspaper earlier.

The centre, together with its undisclosed partners, will study and formulate standards in different aspects of Islamic transactions, including accounting and banking.

But according to Mohammed Hussain, Co-CEO and member of The Board at Ithmaar Bank, there are already certain structures in Islamic finance.

"There is an Islamic accounting standard that has been recognised by the world's multinational institutions, the World Bank and the IMF. It is called AAOIFI, which stands for Accounting and Auditing Organisation for Islamic Financial Institutions," Hussain said in an interview.

"Islamic accounting standards and Shariah principles are the standards in the Islamic finance and they have been followed by all Islamic banks," he said.

The interpretation issue, however, is not unique to Islam, according to Mohammad Faiz Azmi, Global Islamic Finance Leader, PricewaterhouseCoopers.
"We have [conventional] accounting standards since 1800s and we still don't have one accounting standards," Azmi said. "We only just had investment banking so it is not surprising we have different view points."

Islamic finance body eyes standardised common deals

By Mohammed Abbas

An Islamic financial standards body on Thursday said it had created standard documentation for one of the booming industry's most common transactions, which it hopes will make such deals quicker and cheaper.
Lack of standardised documentation and practices has been repeatedly highlighted by the Islamic finance industry as one of the key constraints on the rapidly growing sector.

Islamic law is open to interpretation, which leads to differences in banking practices depending on the financial institution's advisors.
The Bahrain-based International Islamic Financial Market (IIFM) hopes its Master Agreement for Treasury Placement, which is in the final stages of gaining approval by Islamic scholars, will become a standard document.

"Each bank takes its own different decisions. What we are trying to do is put together a document which is a benchmark document that the industry can use," IIFM Chief Executive Ijlal Alvi told a conference on the future of Islamic finance.
Assets invested according to Islamic guidelines have been growing at roughly 20 percent a year worldwide, reaching $900 billion in 2007, and are set to $2 trillion by 2010, accountants Ernst & Young estimated.

By far the most common Islamic financial transaction is commodity murabaha, which involves a bank buying a commodity for a client, and the client paying the bank back the cost of the commodity plus a bank charge or "profit rate" at a later date.
The contract helps banks manage liquidity, and can be used by the client to secure cash by selling the commodity on again, effectively buying money from the bank for the cost of the profit rate.

Islam bans interest, and stipulates that deals must be based on tangible assets -- money cannot be made from money alone.

Alvi and other bankers at the conference said the response to the standard document had been positive, and expected widespread acceptance. However, the document is not mandatory as the IIFM is not a regulator with punitive powers.

"Standardisation of Islamic finance has been raised as a bottleneck for the fast growing industry. It makes sense that it's commodity murabaha that is being standardised because it's the agreement that is used most widely," Safdar Alam, head of Islamic structuring at JP Morgan said.

Alvi said the new contract would be finalised soon, without giving a timeline.
Commodity murabaha deals have come under criticism in recent years on fears that it is just a paper trail to circumvent Islamic law, with no real prospect of a physical commodity changing hands.

Others say the practice of clients effectively "buying" money for the cost of the profit rate by selling the commodity on is simply interest by another name.
IIFM's new contract does not tackle these issues, but bankers say they are working on an alternative to commodity murabaha.