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No Shariah Rules for Breaking Deals Gets Regulator Review: Islamic Finance

No Shariah Rules for Breaking Deals Gets Regulator Review: Islamic Finance

By Khalid Qayum and Soraya Permatasari -Available at:

The leading global Islamic Finance accounting regulator is introducing conditions for contracts that comply with religious laws, seeking to standardize an industry with $1 trillion in assets under management.

The Bahrain-based Accounting & Auditing Organization for Islamic Financial Institutions will for the first time provide a “Shariah-compliant way” for parties to enter and exit contracts, Mohamad Nedal Alchaar, secretary-general of the agency, in Manama, said in a phone interview Sept. 30. The rules will be enforced by December after approval by the advisory board, he said.

“The impact of these standards would be that you will be completely protected from a Shariah perspective,” Alchaar said. “The guidelines spell out the rights and duties of both parties to the contract.”

While civil law already offers legal cover in disputes, counterparties want protection based on Shariah principles, according to Dawood Islamic Bank Ltd. in Karachi, Pakistan. Establishing a global standard would bolster confidence for sukuk investors, said Madzlan Mohamad Hussain, a partner at Zaid Ibrahim & Co., Malaysia’s biggest law firm.

“The biggest challenge for Islamic finance transactions is documentation,” Madzlan said in an interview from Kuala Lumpur Oct. 1. “People are quite wary about what types of risks are involved.”

U.K. Ruling

Investment Dar Co., the Kuwait-based owner of half of luxury carmaker Aston Martin Lagonda Ltd., had an appeal thrown out of a U.K. court this year in a case where the company argued that financing from a bank breached Islam’s ban on interest payments. Malaysia, the world’s largest market for sukuk, wants to become an alternative location to the U.K. for resolving Islamic finance disputes, according to a statement from the nation’s central bank Aug. 30.

Sales of sukuk, which pay returns from assets to conform with Shariah law’s ban on interest, have fallen 17 percent to $11.6 billion this year compared with the same period in 2009, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year.

Shariah-compliant bonds returned 4.9 percent in the three months ended Sept. 30, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, extending respective rallies of 0.8 percent and 5.1 percent in the second and first quarters. Debt in developing markets gained 8.2 percent in the period, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for global sukuk and the London interbank offered rate has narrowed 85 basis points to 358 since the end of June, the HSBC/NASDAQ Dubai US Dollar Sukuk Index showed.

Islamic Assets

The difference in yield between the Dubai Department of Finance’s 6.396 percent sukuk maturing November 2014 and Malaysia’s 3.928 percent Islamic note due June 2015 shrank 47 basis points since June 30 to 368, Bloomberg data show.

The Islamic Financial Services Board, a Kuala Lumpur-based standards body, and the Islamic Development Bank, forecast in April the industry’s assets will reach $1.6 trillion by 2012. Sukuk issuers from the Persian Gulf and Asia plan to sell $6.9 billion of the debt in the fourth quarter, according to data compiled by Bloomberg.

The accounting body, known as AAOIFI, has 200 members worldwide and sets standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria, according to its website.

Standards ‘Enforceability’

Bahrain is part of the GCC, or Gulf Cooperation Council, which also includes Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

“AAOIFI is not a binding institution in all GCC jurisdictions that makes the enforceability of those standards an issue,” Yavar Moini, senior adviser of global capital markets at Morgan Stanley, said in an interview in Dubai yesterday. “AAOIFI has to embark on a greater consultation process with the industry players. I would be in favor of a standardization process which has regulatory support from all jurisdictions.”

The global outlines need to be general enough to suit different jurisdictions and the real test will come in the courts, said Madzlan from Zaid Ibrahim.

‘Cover to Contracts’

There are already ways to get out of a contract legally, according to Pervez Said, chief executive officer of Dawood Islamic Bank, which is 35 percent owned by Bahrain’s Unicorn Investment Bank BSC.

“This is to give Islamic cover to contracts, which are now being managed under conventional laws,” he said in an Oct. 1 interview. “The only difference is that they want to charge a breach of contract or penalize the defaulting party under Islamic law.”

AAOIFI has also proposed rules for religious scholars who vet the products, while specialists in Malaysia are preparing the first global certification for qualified advisers.

“We are improving and widening the scope of Shariah- compliant issues,” Alchaar said in last week’s interview. “Our experience, when it comes to Shariah rules, is that all Islamic institutions without any exception do use our standards in their transactions.”

Best Regards

  • Burj Arab, Dubai

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