Islamic Finance Moves Toward Common Standards

By Oxford Analytica,

Regulation should help provide a basis for the industry's expansion.

Islamic finance is one of the fastest growing segments of international financial markets. Currently, total sharia-compliant assets amount to an estimated $1.125 trillion to 1.275 trillion, with an annual growth rate of 15-20%. The global credit crunch has not left it unscathed, and recent capital market growth has been hampered by conflicting interpretations of the sharia compliance of specific wholesale product structures (sukuk). Nevertheless, the outlook for the sector is positive.

AAOIFI. Efforts to standardize Islamic financial products should enhance the sector's prospects. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) plays an important role in this regard:

--Originally subscribed by an alliance of domestic and international Islamic banks as well as the Islamic Development Bank, industry-sponsored AAOIFI has since extended its membership categories to include authorities that regulate and supervise Islamic financial institutions.

--It also offers observer member status to conventional financial institutions that operate Islamic 'windows' (special facilities offered by conventional banks to provide services to Muslims who wish to engage in Islamic banking).

Standards. AAOIFI’s Sharia Standards 2010 contains 41 standards, including 11 new stipulations pertaining to gharar (uncertainty) in financial transactions, arbitration, zakat (alms giving) and online financial transactions among others. Additionally, its Accounting, Auditing and Governance Standards 2010 contains 40 standards covering the areas of accounting, auditing, ethics and the governance of Islamic financial institutions.

National adoption. These standards are primarily targeted at individual Islamic financial institutions, but they have also been adopted at a national level:

--The AAOIFI's standards have been made mandatory for Islamic financial institutions in Bahrain, Dubai International Financial Centre, Jordan, Sudan, Syria and Qatar.

--Last month the State Bank of Pakistan announced that it had begun selectively to implement AAOIFI Sharia Standards and has advised Islamic banks to prepare for the phasing in of further standards in the near future.

--In other countries, including Indonesia, Lebanon, Malaysia, Saudi Arabia and the United Arab Emirates, AAOIFI standards have been incorporated into national guidelines and are adhered to by AAOIFI member institutions.

Standardization issues. The lack of standardization of Islamic financial products has been a major barrier to the cross-border sale of Islamic financial products. The AAOIFI and its sister standard-setting organization, the Kuala Lumpur-based Islamic Financial Services Board (IFSB)--primarily tasked with developing capital adequacy rules for Islamic financial institutions--have become key players in the construction of the emerging international framework that governs Islamic finance. The AAOIFI has over 200 members from 45 countries while the IFSB has 193 members operating in 39 jurisdictions.

More intrusive regulation. So far the compliance of member institutions with the standards can neither be enforced nor fully monitored, unless they are mandated at country level and then enforced by domestic regulators. Last month, the AAOIFI announced a timetable for taking a more intrusive approach to regulating Islamic financial products, including plans to create a watchdog committee--composed of sharia scholars and market practitioners--by the second half of 2010. However, increasingly different trajectories of Islamic banking and Islamic capital market development could in turn affect the further standardization of Islamic financial products.

Challenges. There are two major challenges to the further growth prospects and pace of development of the industry. Both could benefit from enhanced standardization and the AAOIFI's work more generally:

--Interpretation of Islamic law. Given the absence of a highest religious authority in majority Sunni Islam, assessing the Sharia quality of Islamic financial products depends on a number of representatives from different legal schools with sometimes widely varying interpretations.

--Scarcity of qualified sharia scholars. To address the shortage of scholars well versed in both sharia and finance, a number of programs have sprung up that offer degrees in Islamic finance.

Outlook.Overall, the outlook for Islamic finance remains positive. Recent efforts to develop common standards for Islamic financial institutions should help to provide a sound basis for the expansion of the industry. Learn more Understanding Islamic Finance (The Wiley Finance Series)

Source : Forbes.com

UAE, Kuwait shares 'among world's most attractive'

By Soren Billing
Investors are beginning to differentiate between different GCC stock markets, and valuations in the UAE and Kuwait are among the most attractive in the world, Rasmala said on Thursday.

The regional investment bank said that although it is cautiously optimistic that the worst is now over, a recovery will not be uniform across GCC markets and sectors.

“The global economic picture will be important, but domestic factors will increasingly play their part as governments across the region announce fiscal, monetary and regulatory measures to deal with the current challenges posed by the global economic crisis and lower oil prices,” Khaled Al Masri, partner at the bank, said.
The region’s markets reacted differently to local, regional and international factors in December, signaling that investors are beginning to differentiate between markets and stocks after an indiscriminate sell-off over the past few months.

Valuations of UAE listed equities, which are trading at around five times 2008 earnings, are the lowest in the region and among the most attractive globally, according to Rasmala.

“Lingering uncertainties surrounding the announced restructuring of the mortgage sector and a decimated domestic investor base are precluding a near-term recovery in the market, despite extremely attractive valuations,” Al Masri said.

Valuations of Kuwaiti stocks are also seen as some of the most attractive in the region, but continuing fears over the investment sector and lingering political squabbles are weighing on investors and delaying a recovery, despite official support for the market.

The Kuwaiti central bank last month cut its repurchase rate by 50 basis points to 2.5 percent and has lowered the minimum reserve requirements for banks.

With current valuations at under nine times 2008 earnings, a dividend yield of close to 5 percent and an expansionary fiscal and monetary policy, Rasmala believes Saudi equities are well positioned for any improvement in the global economic environment.

Gas rich neighbour Qatar was the best performing regional market in December, with gains of close to 13 percent.

“The market has been exhibiting sensitivity to both the global environment and oil prices and has benefited from the improvement of both these factors over the month, and the Qatari economy is expected to be one of the fastest growing global economies over the next few years,” Al Masri said.

Valuations of Omani stocks are in line with the regional average and the market awaits fourth quarter results from leading companies to determine whether current valuations are attractive, according to Rasmala.

Source : Arabian Business