Islamic finance in Gulf needs regulation boost
From Australia to South Africa, governments are scrambling to change the law to accommodate the $1 trillion Islamic finance industry, whose avoidance of toxic debt has looked increasingly attractive since the global crisis. But in the Gulf Arab region, birthplace of Islam and cradle of Islamic finance, governments have taken a more passive approach, which experts say is slowing the industry’s growth.
(Photo: A broker at the Karachi Stock Exchange July 5, 2010/Athar Hussain)
“Aside from Malaysia, Sudan and Iran, no government has really owned the Islamic finance project,” Humayon Dar, chief executive of London-based sharia advisory and structuring firm BMB Islamic, said.
In Malaysia, there is a national sharia council that sets rules for Islamic financial institutions. Rules are standardised under the central bank, which has made an active push towards supporting Islamic finance. In the first three quarters of 2010, the Malaysian government accounted for 62.5 percent of all Islamic bonds, or sukuk, issuances globally, valued at $18.4 billion, according to Thomson Reuters data. By comparison, not one sovereign sukuk came out of the Gulf Arab region during the same period.
Saudi Arabia’s laws, by definition, require organisations to adhere to sharia, a set of Islamic legal principles that include a ban on interest. Its central bank does not even differentiate between conventional and Islamic banking. Yet the growth of Islamic banking in the kingdom, the Gulf Arab region’s biggest market, is hindered by the lack of clear laws, a 2009 report by Blominvest Bank, the investment banking arm of Lebanon’s Blom Bank Group, said.
Many Islamic lenders, for instance, are wary of providing mortgages given the lack of clarity in Saudi Arabia over their ability to foreclose on properties in default. Lawyers and bankers say these concerns are putting pressure on Saudi housing demand and prices. A Saudi mortgage law has been in the works for over a decade but it’s still unclear when it will come to pass.