DUBAI (Reuters) - Islamic bankers say they look forward to the day when a central authority can give their financial instruments a religious or regulatory stamp of approval, making them acceptable across the Muslim world.
At a two-day Reuters summit on Islamic finance, they said they already see convergence towards some standards for the industry, which has grown in leaps and bounds in recent years and is expected to keep expanding for the foreseeable future.
“For the industry to keep growing at the same pace, we do need at least to have some basic standards,” said Nasser el-Sheikh, chairman of the Dubai-based Islamic mortgage lender Amlak Finance AMLK.DU.
But they also said complete conformity on religious aspects might not be possible, and some differences would probably persist, between scholars and between Islamic countries.
Except in Malaysia, which has a central board, Islamic banking institutions now follow the rulings of their own in-house panels of scholars on whether the bank’s instruments meet the requirements of sharia, Islamic law.
Islamic law bans usury, usually understood to cover all forms of lending at fixed interest, and imposes restrictions on various other forms of lending.
As with other aspects of sharia, there is no one body widely accepted as the final authority, and banking practices can vary widely from one place to another.
In Saudi Arabia, for example, few banks will touch Islamic bonds or sukuk of a type that is not problematic for investors based in Bahrain or the United Arab Emirates.
“There is no one basic regulatory environment across geographies that manages Islamic banking today,” said Asif Mumtaz, Dubai-based regional head of HSBC Amanah, the Islamic wing of HSBC (HSBA.L).
“That is one of the fundamental pieces that need to be addressed in order for the true potential of Islamic banking to be realized,” added Mumtaz, whose bank has operations in Malaysia, Saudi Arabia and the Gulf countries.
The central bank of each Gulf country should set up its own sharia compliance board and at a later stage regional or international boards could take over, Sheikh suggested. “We will always have grey areas, but having a countrywide sharia board will reduce (them). This is what we really need,” he said.
The bankers said that in fact a broad consensus had already emerged on many common aspects of Islamic finance.
“I think they (the disputes) will be resolved fairly soon because the market itself is going to drive that process. The disagreements are maybe 4 to 5 percent,” Mumtaz said.
Yavar Moini, an executive director at Morgan Stanley, said standardization had arrived for straightforward operations, eliminating the extra costs once associated with preparing the issuance of Islamic bonds, for example.
“It (the time required) is really the same at every level as with a Eurobond issue for a first-time issuer, so it’s a competitive product,” he added.
Shafqat Ali Malik, chief financial officer at Abu Dhabi property company Aldar ALDR.AD, said he could live with the lack of consensus on compliance with sharia, but the industry did need to standardize other aspects of its practices.
“The key thing will come when we get the documentation and the structuring streamlined and have some sort of regulatory body,” he said, suggesting that British practice might be a good model for other countries to follow.
Geert Bossuyt, who deals with Islamic banking for Deutsche Bank (DBKGn.DE), said he had faith in the power of markets to impose a standard, specifically in resolving disputes over aspects of the most common recent form of sukuk.
“I believe in efficiency of markets, also Islamic markets, and I am pretty sure that the market will come to a certain consensus... Hopefully, there will be a crystallization of a couple of structures that we know are acceptable to most of the scholars and can be done,” he said.
He added: “I don’t think there will ever be ... structures acceptable to all of them. But again, if it’s acceptable to 90 percent of the market, it’s probably good enough.”
At least in one aspect of finance, real estate mortgages, the industry has worked out its own models within just a few years of starting operations, said Feras Kalthoum, head of investments at Dubai-based mortgage company Tamweel.
A few bankers said they saw possible problems in setting up sharia compliance boards with wide powers.
Imtiaz Sarfaraz Khan, head of the retail division at newly created Abu Dhabi National Islamic Finance, said it could be hard to get quick answers from a small central board, while in-house boards were readily accessible.
Sheikh Nizam Yaquby, one of the world’s top Islamic financial scholars, also has reservations about imposing standards.
“Scholars are allowed to debate, interpret, to innovate, to have differences. This is a process that will continue. We cannot just say we will have a standard,” said Yaquby, who sits on the Islamic advisory boards of banks including HSBC and French bank BNP Paribas.
(Editing by Will Waterman)
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