DUBAI – Seeking to boost a flourishing Islamic finance sector in their states, leaders of the Gulf Arab nations are planning to have a united Shari`ah board overseeing the region’s Islamic financial institutions.
The “supreme Shari`ah council” will help reduce the cost of issuing sukuk (Islamic bonds), Hussain Hamed Hassan, head of Dubai Islamic Bank PJSC (DIB)’s Shari’ah committee, told Bloomberg on Wednesday, June 8.
Projected in five to ten years, the planned council aims to boost Islamic services offered by Shari`ah-compliant financial institutions, added Hassan who is also the chairman of the Shari’ah Coordination Committee of the Islamic Financial Institutions in the United Arab Emirate.
Like other forms of Islamic financing tools, sukuk do not receive or pay interest.
It typically operates through actual transactions such as profit-sharing or leasing.
Companies that have issued Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest.
The sukuk market has reached $111.9 billion in the eight years to 2008, according to the International Islamic Financial Market.
Islam forbids Muslims from usury, receiving or paying interest on loans.
Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages and banks cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.
Hassan said the new board will help curtail auditing practices by some companies operating at the Gulf Islamic financial sector.
“If I sold assets and I took the money in my pocket, why is the asset still in my balance sheet?” Hassan asked, referring to a trend by some companies to keep assets sold during the sale of sukuk on their balance sheets even after the issuer receives the funds.
He also hopes that the single board will drive central banks to treat Shari`ah- compliant financial institutions as Islamic companies.
Only a “few” central banks, including those in Bahrain and Sudan, see the Islamic financial institutions as Islamic companies, while the majority are dealing with them as non-Islamic institutions, he said.
Islamic banks have proved a success because of rules that forbid investing in collateralized debt obligations and other toxic assets that cause financial crises.
Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.
The Shari`ah-compliant system is now being practiced in 50 countries worldwide, expanding by 15-20 percent a year, making it one of the fastest growing sectors in the global financial industry.A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, also joined the Islamic banking business.
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