How relevant are standard setting bodies to the industry, and how much influence do they have on the overall practice of Islamic finance? NAZNEEN HALIM investigates.
In 2008, Sheikh Taqi Usmani rattled the industry with claims that more than 85% of Middle East Sukuk are not Shariah compliant. Subsequently, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued an advisory on Sukuk issuance, which underlines the purchase undertaking in Sukuk Musharakah and Mudarabah issuances; pressuring issuers to legally transfer ownership of assets to bondholders.
As much as the advisory had caused issuers and investors to think twice about the nature and mechanism of the bonds, most industry players found the advisory irrelevant. Responses such as: “Who cares about AAOIFI?” and “It (AAOIFI) is only relevant in one country; i.e. Bahrain.” were among those elicited. Which brings one to question the relevance of such standard setting bodies; and whether the fragmentation and lack of standardization of fatwas could be one of the reasons why these standard setting bodies are important, but not all-encompassing.
Who’s who
Currently, the three most prominent standard setting bodies are AAOIFI, the Islamic Financial Services Board (IFSB), and the International Islamic Financial Market (IIFM), all of which are influential in their own right; but only in pockets.
Hooman Sabeti, consultant at law firm Allen & Overy elucidated that, from a practitioner’s point of view, standard setting bodies are: “A good point of reference.” He goes on to add that at present, there is no total consensus on the adoption of such standards, but issuers and investors do actually compare the standards that are set out by standard setting bodies.
“That itself saves a great deal of efficiency because it narrows the discussion down to how things are different from standards that everyone is familiar with. Even if you don’t adhere to the standards entirely, it at least limits the things you have to worry about, because you are aware to which extent it departs from the standards. So I think in that sense. they do serve quite a useful function,” Sabeti added.
For cross-border deals, however, Sabeti adds that AAOIFI standards do come about in discussions: “People generally take into account and talk about the extent to which structures adhere to or do not adhere to AAOIFI standards.”
Taken more seriously
According to a Malaysian-based banker, a more gradual and flexible approach has to be taken to the harmonization of standards, no matter how enticing fixed Shariah standards may seem to industry stakeholders. “We cannot expect all relevant standards to be produced within a short period of time. They require considerable time for research, public hearing and other necessary regulatory measures.
“The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), for example, has set a good practice of gradually developing systematic Shariah standards, and even these are open to review and reconsideration from time to time.
A quick and premature Shariah standard will subject the industry to various complications, not to mention a reputational risk,” he added.