Setting a Standard in Sharia Finance

The ArabianBusiness.com website featured an article on Friday stating that Gulf Cooperation Council (GCC) states may move towards a single Sharia-compliant standard for Islamic financings.  This follows another article earlier this month in the New York Times about the rising demand

Dubai International Financial Centre
DIFC - Dubai

and short supply of Sharia Finance Scholars.  This short supply has in some respects led to some consolidation in the Sharia finance sector – by having the same scholars sit on multiple boards, one group is having substantially large influence in determining the industry’s direction.  This helps in turn create a de facto standard for Sharia compliance.

The Sharia finance industry has two primary regulatory authorities at present – the Bahrain-based Accounting and Auditing Association for Islamic Financial Institutions (AAOIFI) and the Kuala Lumpur-based Islamic Financial Standards Board (IFSB) both of which have issued certain standards on Shariah finance.  IFSB is considered by some to be more the liberal standard-bearer and the two organizations have in some way helped bifurcate the industry into a MENA sector and a Southeast Asian Sector.  That said, both of these organizations’ rulings and policy guidelines are non-binding and voluntary.

The challenge of a broad set of Sharia standards becomes more problematic when taking into consideration the introduction of Sharia finance in non-Islamic jurisdictions such as the United States, the UK and France.  The UK Financial Services Authority (FSA) has taken certain initiatives, as have other governments. However, the legal structures in these nations mean that Sharia finance will need to conform to local laws – something that may cause deviation with a standard set in say, the GCC.

Taking the above into consideration, given the high concentration of capital in the GCC, the consolidation of GCC standards in Sharia finance can be a crucial step towards creating a global standard for the industry (a standard that can perhaps be modified slightly to comply with the laws of other jurisdictions as well).  This will help the industry grow in the region first, and that in turn will create competition – perhaps creating a situation where investment entities will have to come up with attractive, high-return Sharia-compliant vehicles to compete.

Shutting off Iran from the International Downstream Oil Market

This week saw several important developments with respect to Iran’s relations with the international oil and gas market.  Following a long history of US sanctions, including the 1996 Iran-Libya Sanctions Act, the OFAC sanctions, as well as the more recent blacklisting of certain Iranian banks, large multinationals are increasingly being encouraged to leave Iran.  This initially started with international financial instutions and increasing disinterest on the part of the major oil companies in doing business in Iran.  The problem is now deepening.

It was reported this week that Russia’s Lukoil would no longer be selling gas to Iran.   Another report stated India’s Reliance would be abandoning a contract to import Iranian oil.  Reliance had earlier stated that it would no longer sell Iran refined gas.

Reports have abounded that the Iranian government is increasingly stockpiling gasoline in the event of increased sanctions.  Interestingly, this problem is concurrent with the regime’s plan to remove subsidies on key commodities such as gasoline.  Given Iran’s limited refining capacity, increased sanctions and the lack of subsidies could arguably force Iran’s economy to grind to an effective halt.  Another critical issue is that Iran is desperately in need of international investment and technology in its current oil fields and its refining capacity cannot even meet local needs.

As a follow-up, reades may find this article useful as it outlines parties in Iran’s crude oil export business.

Gazprom and the New Hydrocarbon Market

Generally the impression in the US media is that international energy companies have been largely unaffected by the global economic crisis. This article in Thursday’s Financial Times outlines challenges facing Russian energy giant Gazprom.

Coming off the victory of passing health care reform, the Obama administration is now taking on energy challenges, including a decision to begin some exploratory drilling in the Atlantic ocean.  Due to the inherently high costs of drilling in North America (compared to the MENA region) it remains to be seen whether this will be profitable or simply overshadowed by alternative energy becoming more commonplace.

A review of MENA Region Legal and Business Affairs.