Sukuk Templates Could End Delays Caused by Sharia Scholar Disagreements

The International Islamic Financial Market is working on common templates for structuring sukuk to reduce delays caused by disagreements between Shariah scholars.

The standards-setting body is drafting frameworks starting with leasing contracts known as Ijara, Chief Executive Officer Ijlal Ahmed Alvi said in a May 6 interview in Jakarta. Bahrain- based IIFM is responding to feedback from members including the Islamic Development Bank and the Malaysian and Saudi Arabian monetary authorities, he said.

Worldwide Islamic debt sales have grown by an average of 35 percent over the last five years, straining the ability of religious experts to approve offerings and highlighting the need for common global standards. Indonesia’s government plans to reduce sales of Ijara sukuk as some scholars say the structure the country uses isn’t fully Shariah-compliant, Vice Finance Minister Bambang Brodjonegoro said last month.

“Islamic finance is growing at a good pace, but what we still need is unification,” said Alvi. “Having a unified set of standards would make the market more cost-effective and efficient.”

Disagreements among Shariah scholars resulted in Goldman Sachs Group Inc. delaying a debut sukuk in 2011. The offer, which had been approved by Ireland’s central bank, was postponed after the lender was criticized for not ensuring it would be traded at par value as required by Islamic law.

Mid-East View

Kuwait’s Investment Dar Co. contradicted its own scholars’ assessment after missing a payment on a Wakalah deposit held by Lebanon’s BLOM Development Bank SAL. Dar argued the financing breached Shariah principles because it “was taking deposits at interest,” according to a court document from December 2009.

All of the $13.9 billion of outstanding Indonesian government sukuk as of the end of 2013 used the Ijara structure, according to a March report by the Asian Development Bank. In Malaysia, only around 10 percent of the $163.5 billion of Islamic debt is Ijara-based, according to the report.

“Middle Eastern investors view that some sukuk issued in Southeast Asia doesn’t fully comply with their guidelines, limiting or restricting the number of potential investors,” Abas A. Jalil, chief executive officer at Amanah Capital Group Ltd., a consultancy in Kuala Lumpur, said in a May 9 interview. Common standards will “enable investors to make investment decisions in a more objective manner rather than based on the debatable perspectives of Shariah scholars,” he said.

Scholar Shortage

The templates may also help address an international shortage of scholars. The 20 most-active experts each advised 31 institutions on average and two counseled 85, according to a 2011 report by Funds@Work AG, a consulting company based near Frankfurt.

The central bank of Malaysia, the world’s largest sukuk market, has since 2010 forbidden scholars from sitting on more than one Shariah advisory board for each type of institution, meaning they can only advise one bank or pension fund for example. Most countries don’t impose limits.

Worldwide sales of debt that pay returns on assets to comply with Islam’s ban on interest increased 12 percent this year to $17.2 billion from the same point in 2013, data compiled by Bloomberg show. Shariah-compliant banking assets will double to $3.4 trillion by 2018 from last year, according to Ernst & Young LLP, which will fuel demand for more issuance.

“Enterprises with a global presence may be encouraged to explore sukuk issuance versus conventional if the standards are more widely accepted,” Raj Mohamad, managing director at Five Pillars Pte, a consulting company in Singapore, said in a May 9 interview. “Standardization can also result in cost reduction in terms of legal and documentation cost.

(Insurance Journal / 13 May 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

IFSB eyes stronger implementation of Islamic finance standards

The Islamic Financial Services Board (IFSB) will release an updated 10-year industry roadmap next week as it places greater emphasis on the implementation of its standards with regulators around the globe.

Guidelines from Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in some Muslim-majority countries and makes inroads in western markets.

The IFSB will release a Mid-Term Review (MTR) of the industry’s 10-year framework document on May 19, outlining benchmarks to monitor industry progress in a more focused way, IFSB secretary-general Jaseem Ahmed told Reuters.

The original framework, released in 2007 by the IFSB and the research arm of the Jeddah-based Islamic Development Bank , identified 16 recommendations for policymakers but did not spell out detailed metrics to track their progress.

“The MTR proposes a stronger implementation plan. This plan includes concrete initiatives – to be undertaken by a range of stakeholders – to bring the recommendations to life.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide, a decision driven in part by their diverse legal and regulatory backgrounds.

Now, however, the 184-member IFSB hopes to draw up more concrete steps for regulators while still leaving some flexibility given the wide range of industry development.

“A roadmap can be very helpful to national authorities, and the national industry, but in practice quite a few years of experience is needed before it becomes practical to develop an effective roadmap.”

INTEGRATION

Over the last decade, the IFSB has issued 22 standards and guidelines and now plans to develop new standards for Islamic reinsurance (retakaful) and capital markets, said Ahmed ahead of the IFSB’s annual summit to be held in Mauritius next week.

“The greatest need is to bring takaful and capital markets to a state of comparability, from the regulatory perspective, with the banking sector. So these are two areas where we are gearing up for additional issues.”

A working group to study a standard for retakaful has now been launched and another working group will soon be set up to study a standard for capital markets, Ahmed said.

“This is an important initiative to facilitate the integration of Islamic finance into the global economy by bringing it within the global surveillance mechanism of the International Monetary Fund and the World Bank.”

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy, with further guidance in the pipeline.

The IFSB has now begun work on a technical note on stress testing and it has also conducted a study on liquidity issues to help shape a guidance note.

The latter would take up the challenges posed to Islamic banks by the liquidity coverage ratio and net stable funding ratio introduced by the Basel III framework, said Ahmed.

MARKETS

Islamic finance has its core markets in the Middle East and Southeast Asia, but its expansion into new jurisdictions has meant the IFSB is increasingly in touch with regulators in Africa, Asia and Europe.

“Implementation is picking up as the market grows. We see a clear pick up in implementation once the market becomes larger than 5 percent of the total of the respective financial sector.”

Countries like Senegal, Gambia, Nigeria and South Africa have taken steps to develop the industry, while detailed regulatory frameworks have emerged in others, said Ahmed.

“Oman and Kazakhstan are two examples of new markets in which policy-makers have benefited from the experiences of earlier jurisdictions.”

Over the past year, the IFSB has engaged with regulators in Nigeria, Sudan, Hong Kong, Bangladesh, Afghanistan and Libya; It held regional sessions at the Asian Development Bank and in Oman for the Gulf region. Its last European forum was hosted by Italy’s central bank.

“We are now preparing capacity and awareness building to be undertaken in Central Asia and in West Africa,” Ahmed said.

In March, South Korea’s central bank became a member of the IFSB, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.

(Business Day / 13 May 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com