As scholars quibble, sharia banks eye convergence
As scholars quibble, sharia banks eye convergence
By Liau Y-Sing and Tom Freke
KUALA LUMPUR/LONDON (Reuters) – Jurists may never fully agree on how to interpret the sharia but controversial Islamic finance structures are likely to be dropped eventually as the industry strives to reach wider markets.
Disputed contracts like bai bithaman ajil and bai inah will probably be pushed to the sidelines while mudaraba and musharaka bond structures will be modified as governments and corporates try to narrow a gap in opinion that shuts out some investors, some bankers say.
“As more cross-border transactions take place and there is a need for meeting standards and requirements of a broader segment of market, naturally there will be a trend toward convergence,” said Zarinah Anwar, chairman of the Securities Commission, which regulates Malaysia’s capital markets.
The interpretation of religious scriptures is key to the $1 trillion Islamic banking industry as issuers and investors look to the sharia to determine if contracts are halal or haram.
Differences in sharia opinions can virtually bring Islamic financial markets to a halt, as evidenced by the contentious ruling of an influential industry body last year on the validity of Islamic bond structures.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) said repurchase undertakings — a pledge found in most Islamic bonds that the borrower would pay back their face value at maturity — violates the duty to share risk in sukuk mudaraba and musharaka.
Issuance of musharaka and mudaraba sukuk fell 83 percent and 68 percent respectively last year, according to Moody’s Investors Service, and some bankers said it was partly due to the ruling.
Islam has various schools of thought and depending on how one reads the sharia, certain traditional banking practices may or may not be allowed under Islam.
Malaysia, which has the world’s largest Islamic bond market, follows the Shafi school of Sunni Islam. It is generally seen as the most flexible with sharia interpretation, allowing practices such as sale of debt which is disputed by some Gulf scholars.
Saudi Arabia, with its Wahhabi form, is seen to be strict, while the Gulf states chart a middle course.
Industry experts say the wide range of views helps the sector to develop although it can sometimes make it hard to sell products across jurisdictions.
“There is not as much diversity of opinion as people think,” said Neil Miller, Norton Rose’s Islamic finance head. “If there was total agreement on everything you wouldn’t have an industry that is capable of evolving.”
ALL THINGS TO ALL MEN?
Any consensus on sharia interpretation could be hard to reach. However, the gap may be narrowing, as Malaysia shows signs of tempering its market-driven approach to please cash-rich but conservative Middle East investors.
The Southeast Asian country appears to be moving away from the popular but controversial bai bithaman ajil or deferred payment sale contract which has been criticized as an interest-based loan in Islamic dress.
A Malaysian appeal court recently ruled that this structure is a valid Islamic sale transaction and not a loan. But the country’s RHB Islamic Bank is reported to have begun phasing out the contract and others are signaling a similar shift.
“Bai bithaman ajil will be there,” said Azrulnizam Abd Aziz, chief executive of Standard Chartered Saadiq Berhad. “However, I would say less and less issuance and products will be structured under the bai inah and bai bithaman ajil.”
A globally acceptable standard may be harder to attain.
“Global standards emerge only after strong national standards,” said Humayon Dar, BMB Advisors chief executive.
“There is a need for strong national sharia standards, the kind of thing that Malaysia, Pakistan and Sudan are putting in place. Once you have a number of these national standards out there, you can then look to cross-border standards.”
SOURCE: http://www.reuters.com/article/IslamicBankingandFinance09/idUSTRE53G14X20090417