LUXEMBOURG, 11 November 2005 — Rapid growth in Islamic banking is giving some central bankers headaches, plunging them into the debate over how to fit Shariah-compliant investments into the broader global financial system.
At the same time, those inside the Islamic banking community have yet to harmonize the operating rules under Shariah, the laws that govern Islam.
Muslims who invest along Shariah guidelines will not purchase assets that pay interest, or derive profits from alcohol, pork and gambling.
The majority of today’s Islamic-based investments, estimated to be anywhere from $200 to $400 billion in size globally, are built around the concept of profit-sharing rather than the charging of interest.
“Indirectly you are getting a return, but the difference is that this return is not guaranteed. That is our headache in the central bank. You pull in all these funds and then you say the return was so much. So transparency is needed,” said Lebanese Central Bank Governor Riad Salameh.
Salameh, speaking on the sidelines of the Islamic Financial Services Forum which ended on Nov. 9 said the fact that financial decisions are open to religious interpretation makes it challenging to create a global standard.
“Islamic banking is relying on interpretation that can be different in every bank based on the religious source. So to go from that point to a standard approach will take some time and convincing,” he said.
“They don’t have an order or a hierarchy, even religiously, that they can go to and say these are the principles to adopt.”
One leading Shariah scholar however says the principles are all the same.
“We are in agreement on principles but the difference is in the details...there are different practices,” said Sheikh Nizam Yaquobi, a Shariah scholar at Bahrain’s Global Securities House and a member of the Accounting and Auditing Organization for Islamic Financial Institutions (AOFIFI).
Yaquobi said recent research in Bahrain found 90 percent of the rulings of Shariah and boards internationally are consistent, citing the 10 percent as leaving room for innovation and debate.
But the basic ground rules have yet to be set, and that is creating problems for the industry too. “It is a headache. The headache being that it operates on models that are not identical to existing models. We are not based on borrowing and lending on interest,” Professor Rifaat Ahmed Abdel Karim, secretary-general of the Kuala Lumpur-based Islamic Financial Services Board, said.
For many forum participants, hearing that the market is growing at a steady 15 percent per year is small comfort when the market is still considered so opaque.
That kind of growth however and the untapped investment potential of roughly 15 million Muslims living in Europe alone is providing the industry a strong incentive to address its still numerous problems.
In addition to the lack of standardized Shariah rulings, the investor base is still considered uninformed. Sector growth is also being hampered by a serious lack of information and sufficient disclosure, barriers to innovation, and the myriad of banking regulations that shift from country to country.
Innovation in the small market and adoption by a critical mass of investors requires banks to create new instruments, however recouping their costs will be difficult. Analysts studying the sector lament the lack of information and disclosure available to investors, hampering their work.