120 Islamic Finance in Practice
The existence of the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), the Islamic Financial Services Board
(IFSB), and the Islamic Ratings Agency are all positive steps required to
build a robust industry platform, and the standards being developed by
AAOIFI for example cover both accounting and Shari’a standards that are
becoming acceptable in more and more jurisdictions, which will engender
the acceptability of Islamic finance as an alternative form of finance.
There have been some controversies recently in terms of the Shari’a
compliance of some of thesukuksthat have been issued relating to the
“purchase undertaking” aspects in the structures. Also some scholars have
opposing views on the structure oftawarruq. These have become issues, but
that is to be expected as the sector is in its infancy, enhanced by the fact
that Shari’a is subject to interpretation and opinion. But institutions such
as AAOIFI have through their Shari’a board addressed these issues.
The implementation of standardization of structures and documentation
will take the development of the secondary market a long way. In the case
of Malaysia, thesukukmarket is larger, better standardized and with one
regulatory body based on one school of Islamic jurisprudence, thus the
functionality of the market is a lot easier than in the Gulf nations. Even the
tax regime is friendlier in terms of claiming backsukukissuance expenses.
Whereas in the Gulf area, each newsukukissue has to comply with the
different school of Islamic jurisprudence’s interpretation of that territory,
hence the abundance of differentsukukstructures. Thankfully, this is
changing as increasing numbers of Shari’a boards of dcholars from different
schools of jurisprudence are working together, and their pronouncements
are becoming more encompassing. Even the Shari’a board of AAOIFI is large
and varied and they are setting standards that arebecomingmoreacceptable
over many jurisdictions.Product ranges
As the sector has grown and its liquidity put to productive use, there has
been considerable development of products; we have seen the introduction
of more structured products, including capital protection, hedge funds and
sukuks.
More is on the way as investors’ appetites for moresophisticated products
increases, and international banks in their desire not to lose clients are
actively developing and marketing these products for Islamic markets.
Furthermore, the sub-prime crisis has created liquidity issues in interna-
tional markets and these international banks are turning their gaze to the
Middle Eastern markets for their funding.
The requirements in these markets are also now geared to investing in a
Shari’a-compliant way. Many of these product vendors are finding that when
they trawl the Gulf and Islamic markets with theirproducts, invariably