Islamic Finance is in vogue. Various financial centres around the world are vying with each other to assume the mantle of pre-eminence in Islamic finance, challenging upstarts with a wider variety of Islamic finance and product “innovation”.
In the Gulf, Bahrain has tried to develop such a niche, while Malaysia has been a pioneer in the Far East. But it is London, with five licensed Islamic finance institutions, that has been making the running, and the finance institutions located in that city have been vigorous in lobbying the UK government to treat Islamic finance products on a par with non-Islamic offerings.
What London seems to offer also is a high level of regulatory supervision over Islamic institutions operating in the UK. This aspect seems to have taken a bit of a knock in the Gulf over a fraud investigation at the UAE’s largest Islamic bank, Dubai Islamic Bank. However, it is from such lapses of internal controls that the Gulf regulatory authorities can learn and strengthen supervision processes to regain public trust.
While progress has been made in the UK, the most recent announcements by Alistair Darling, the chancellor of the exchequer, in the March budget statement seem to have put some of the recent momentum on hold.
What the current chancellor is expected to do – and which could give Gulf Islamic financial centres their opportunity – is to close a loophole created by his predecessor, Gordon Brown, when the UK Government was trying to make it easier for Muslims to buy their own homes.
UK financial watchdogs seemed to have discovered that some commercial properties were being structured to take advantage of a sharia-compliant tax break relating to stamp duty. The situation will be different after the loophole is closed. Home owners using financing compliant with sharia laws will have to pay stamp duty more than once, making it financially unattractive, but morally imperative, for those most committed to Islamic financing.
The time has come to take a step back and ask a fundamental question – is Islamic financing, as operated today, one more tranche of an innovative financing product range, or a way of life for devout Muslims? If it is the former, then it does not really matter whether Islamic financing is perceived as one more variation of ethical investment, which has long been around in the West. It then also does not really matter whether an Islamic financial centre is located in London or Paris.
If the issue is a more fundamental one, and Islamic finance is a way of life, then core Islamic product development, sharia supervision and regulatory oversight should be nearer home, in the Muslim world.
The Gulf is now awash with oil surpluses. It should not be beyond its reach to initiate world-class Islamic finance training and research centres, along with a transparent debate between the Gulf regulatory authorities, banking practitioners and sharia boards of all persuasion, whether those perceived to be more dogmatic or more “flexible” in their sharia rulings.
To its credit, the UK government has listened to all parties and established working groups to assess legal, regulatory and sharia compliance issues. The same ought to happen in the Gulf, as too often, products are launched with bewildering speed, leaving Muslim investors confused and, as illustrated in the recent fraud cases, too often without proper internal supervision.
The Bahrain Monetary Agency has been at the forefront in establishing a regulatory framework and oversight that has attracted a viable core of Islamic financial institutions to the kingdom. There is still room for more such Islamic centres and product development, including funding of endowed academic chairs in Islamic finance at major Gulf universities.
The rationale is simple: the major Islamic market, in terms of breadth of registered Islamic financial institutions, and depth in terms of potential business and deposits, is in the Arab Gulf and other Middle East countries, as evidenced by the boom in Sukuk issuance for Gulf corporates and sovereigns.
Nearly all newly licensed financial institutions and investment houses in the Gulf have adopted an Islamic character, or a preference for Islamic financing products in their portfolios. Gulf-based Islamic intellectual capital can be put to the service of other financial markets, instead of witnessing a reverse intellectual capital flow. Regionally-based sharia supervisory boards would be closer to their constituents to discuss, refine and debate new products in the Arabic language, instead of through translations, however good those might be.
At one stage, the Gulf was a mere producer of crude oil, some of which was then processed and resold back to the Gulf as finished higher value products. The day has now come for Islamic deposits to be “reprocessed” in the region, through local Islamic financial institutions, and re-exported as high value financial services to others – as long as the proper regulatory oversight is in place. This is how London became pre-eminent in providing world-class insurance and reinsurance services to the rest of the world.
Dr Mohammed Ramady, The National (Abu Dhabi)
Dr Mohammed Ramady is a former banker and Associate Professor, Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.