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
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.