AAOIFI to investigate breaches of Shari'ah-compliance, S&P predicts $20bn in sukuk pipeline in 2010

Arabian Business is reporting that AAOIFI will begin to investigate breaches of Shari'ah-compliance by Islamic financial institutions. They will work with companies with violations and only will approach authorities if the institutions refuse to comply. The secretary general of AAOIFI, Dr. Mohamad Nedal Alchaar, says that "It will be amicable, as we are the gatekeepers of this industry and we want to work through negotiation" adding that "Only if that does not work, will we go through the authorities". One important thing that is not clear from this article is what specifically will be reviewed. Will AAOIFI review the transaction documents of any institution that claims to be Shari'ah-compliance and pass judgement on the compliance of each product or will it instead focus on ensuring that Islamic financial institutions have the necessary safeguards in place (e.g. a Shari'ah board that reviews the products and audits the activities of the bank on a regular basis)? The AAOIFI guidelines are not universally required and there could be disagreement about whether they apply to Islamic financial institutions in jurisdictions where they are not mandatory.

In general, this is useful to prevent institutions from offering products that are described as Shari'ah-compliant without actually ensuring that they are approved as Shari'ah-compliant. However, if it is done poorly, it could hamper the growth of Islamic finance by restricting Islamic financial institutions from offering new products which may receive approval by the institution's Shari'ah board, but not be approved yet by AAOIFI. I will provide more comments when the scope of the AAOIFI committee is released with more specifics.

Standard & Poor's says that the pipeline for sukuk in 2010 is $20 billion, which would be roughly equal to the total issuance in 2009 ($23.3 billion). This estimate is calculated using those sukuk "publicly announced that is likely to come to market if conditions permit", according to analyst Mohamed Damak. In January 2010, $1.1 billion of sukuk have been issued according to Dealogic, which is up significantly from one year ago when only $77 million were issued as the global financial crisis was still limiting access to capital.

An article describe the CMHC report on Islamic home finance in Canada which I wrote about earlier this week. The public/private initiative Toronto Financial Services Alliance welcomed the CMHC report and said it had established a working group to look at the challenges and opportunities for Toronto in the Islamic finance industry.

The UK-based International Financial Services London released their latest annual report on the Islamic finance industry. The UK remains the largest Western center for Islamic finance with 22 Islamic financial institutions. The U.S. has 9 and this includes the two largest Islamic mutual funds in the world, the Amana Income and Growth funds.

Without going into too much detail, I agree with the Chief Executive of Qatar Financial Centre Regulatory Authority who said it was a "myth" that Islamic financial products are safer than conventional products. Islamic finance can alter the relationship between parties in a financial contract and can encourage equitable dealing and transparency, but it cannot remove risk from investments when they are structured to mirror conventional debt products. The close look that Nakheel's sukuk received when it was at risk of defaulting highlighted some of the areas where the idea that it was asset-based (and thus more secure than conventional debt) were exposed as false because the structure meant that in case of default, it would be treated as an unsecured obligation of Nakheel.

Other News

• The lord mayor of London said that oil companies could turn to the U.K. for Shari'ah-compliant loans.
  
• India is planning to change its regulations to allow non-banking Islamic financial institutions to attract investments from the Gulf and encourage the underbanked Muslim majoirty to participate in the financial system.
  
• Tamweel's chairman said it may still be merged with Amlak in the first quarter of 2010.
  
• DSAM Kauthar commodity funds released its performance results for 2009.
  
• The Central Bank of Bahrain's short-term Sukuk Al-Salam securities were oversubscribed and provide a return of 1.05%.
  
• The Islamic Corporation for the Development of the Private Sector, a part of the Islamic Development Bank said it would work with the government of the Maldives to establish an Islamic bank in the island country.
  
• Bank Islam, a Malaysian Islamic bank, is looking to acquire Islamic banks in Southeast Asia, including in Indonesia.
  
• The Malta regulators are close to being able to publish guidelines on an Islamic securities market, which could be released during the first half of 2010. There are still some legal and technical problems according to the Finance Minister.
  
• Dar Al-Arkan, the Saudi real estate developer is on an international roadshow for a sukuk that could be up to $1 billion.