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GCC hampered by differences in Islamic finance practices
The current state of and recommendations for Islamic Finance in the region
June 4, 2015: Currently, there are approximately 500 Islamic banks operating in 75 countries around the world (Asutay, 2011: 41). Although Islamic finance began with projects such as Mit Gamyr in Egypt in 1963 and Tabung Hajj in Malaysia in 1967, the first Islamic bank, the Dubai Islamic Bank, which is one of the biggest in the world, was incorporated in 1975 in the UAE. Soon after, Kuwait Finance House was established in 1977. In 2011, it had 54 branches and was ranked one of the best Islamic banks globally. Saudi Al Rajhi Bank is currently the largest Islamic bank in existence.
The aim of this article is to briefly reveal the current state of Islamic finance in the GCC, explore the region as a platform for Islamic finance, and make recommendations for the future success of the GCC states as a centre for Islamic finance. In terms of asset base, the share of the GCC Islamic banks constitutes 70% of the global total (Asutay, 2011: 41). Islamic banking assets in the GCC reached $445 billion at the end of 2012, up from $390 billion in 2011. This represents a 14% year-on-year growth (Business Albawaba, 2013:1).
“Thus what started as a small rural banking experiment in the remote villages in Egypt, has now reached a level where many mega-international banks are offering Islamic banking products.” (Asutay, 2011: 41 taken from Iqbal and Molyneux op. cit., 1.) In 2008, Saudi Arabia had 127 shari’ah compliant funds, Kuwait 45, Bahrain 29, UAE 27 and Qatar 2 (Wilson, 2009:15). In terms of sukuk, Bahrain has been the most active in the GCC. The UAE is the leader in terms of the value of sukuk issuance and Saudi Arabia is the GCC market with the most potential (Wilson, 2009: 22).
Although a small market, the major banks in Qatar have established Islamic affiliates, such as the Qatar National Bank, which has an Al Islami subsidiary; the Commercial Bank of Qatar, with its Al Safa Islamic banking subsidiary; and Doha Bank, which has the subsidiary Doha Bank Islamic (Wilson, 2009: 28). The Qatar Islamic bank branched overseas and owns European Finance House and the Asian Finance Bank and has subsidiaries in Lebanon, Bahrain, Yemen, and Kazakhstan (Wilson, 2009: 28).
Bahrain has functioned as a major regional centre since 1976, hosting inter alia the Association of Accountants of the Islamic Finance Industry (“AAOIFI”), The Bahrain Institute of Islamic Banking and Finance (“BIBF”), the International Islamic Finance Market (“IIFM”), and the Bait al Bursa of the Bahrain Financial Exchange (“BFX”). In contrast to other GCC states, Bahrain has kept its market open to foreign banks, while for example, Saudi Arabia and Kuwait licenced only majority-locally-owned institutions. As a result, Bahrain has the most Islamic banks in the GCC, with 24 Islamic banks and 11 Takaful companies (Wilson, 2009:25). Oman has two full-fledged Islamic banks, Bank Nizwa and Al Izz International Bank, and a plethora of conventional banks with Islamic windows, including Bank Sohar, Bank Dhofar, Bank Muscat, Ahli Bank and National Bank of Oman (NBO). According to the rules in Oman, a single branch cannot operate both an Islamic window and conventional banking services, while the windows must disclose the sources and the uses of their funds (Global Islamic Finance Magazine, 2013:1).
Currently, the UAE is taking measures to promote itself as the hub of Islamic finance, such as establishing the Dubai Global Sukuk Center and the Dubai Center for Islamic Banking. However, the UAE and GCC are not equipped with sufficient regulatory and dispute resolution framework to sustain themselves as a global centre of Islamic finance. Although the UAE has a law allowing Islamic banks to exist, UAE Federal Law No. 6 of 1985 Regarding Islamic Banks, Financial Institutions, and Investment Companies, it currently does not have an Islamic banking law. One was proposed in 1985, but never gazetted. Furthermore, the UAE and DIFC lack a centralised shari’ah board.
All GCC states have passed some sort of legislation related to Islamic banking. However, Saudi Arabia has been the least active, with no mention of Islamic banking in its banking legislation or even in the Capital Markets Law of 2003 (Wilson, 2009:7). According to Wilson (2009:7), SAMA and Capital Markets Authority have not issued a single document pertaining to Islamic finance.
Wilson (2009:25) purports that there is little regulatory convergence in the GCC. Each state has developed its own regulatory system for banks and financial institutions. In the UAE and Qatar, the financial centres have their own laws and regulations. There does not exist an avenue to apply shari’ah in the Dubai International Financial Center or (“DIFC”) Courts or Qatar Financial Center (“QFC”). The local courts in the GCC may apply shari’ah to matters, however, in reality; this is relegated to family and inheritance matters. Although several arbitration centres exist in the UAE and GCC, none are effective for Islamic finance. As with the entire international Islamic financial industry, the Islamic finance industry in the UAE and the GCC lack sufficient regulation, standardisation, harmonisation, financial reporting and an adequate dispute resolution mechanism to regulate the industry and ensure its survival as a viable financial platform into the future.
Inconsistency in the financial reporting of Islamic banks across the GCC is also resulting in uncertainty for the investor and weakening the GCC position in the industry. For example, Kuwait Finance House (“KFH”), except KFH Bahrain, does not use the International Financial Services Board (“IFSB”) and AAOIFI standards for capital adequacy. As a result, KFH financial statements (except KFH Bahrain) may not truly reflect KFH’s capital structure and stakeholders may not be able to truly assess whether capital structure decisions are made to maximise shareholder equity.
Currently, even though all six GCC states host Islamic financial institutions, Bahrain is the only GCC nation which hosts a centralised national shari’ah board (CPI Financial, 2013:1). Shockingly, even the DIFC and QFC, which serve as platforms for Islamic financial business, are not equipped with a central shari’ah board.
Furthermore, on a regional basis, there are conflicting decrees regarding interpretation of the shari’ah. Therefore, each GCC state possesses a national shari’ah Board as does Bahrain, which extends jurisdiction over its financial free zones. However, one central shari’ah Board should be created for the GCC, along with the GCC monetary union and uniform currency.
Each GCC state is competing with each other for prominence in Islamic finance with each state issuing different laws, regulations and interpretations of the shari’ah. Although, seemingly strong in Islamic finance in terms of numbers, the GCC lacks regulation, standardisation, harmonisation, an effective dispute resolution mechanism, coordination between member states, and a centralized shari’ah Board.
I recommend that the UAE implement my plan for the Dubai World Islamic Finance Arbitration Center (DWIFAC) and Jurisprudence Office (DWIFACJO) as an initial attempt to put in place a dispute resolution framework for the UAE and GCC. In addition, I recommend that the GCC states adopt the AAOIFI standards in its financial reporting. Finally, I advise that the GCC emerge as a unified bloc in the Islamic finance industry.
Camille Paldi is CEO of Franco-American Alliance for Islamic Finance
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