A GCC Shari'ah council

Plans are underway to create a Shari'ah council for the GCC (a "Shari'ah council for banks" according to the Gulf News headline). I think this is largely unnecessary. There should of course still be Shari'ah standards but whether those standards are national, supranational or regional doesn't matter in the big picture.

The key to Shari'ah standards is that the people determining them are credible in the market among people who are concerned with Shari'ah-compliance. In general the Shari'ah-compliance aspect of financial products matters less than the financial outcome of the products to most investors. This does not discount the impact of Shari'ah-compliance (and the auditing function that Shari'ah scholars provide). Yet, this does not seem to be a function that requires regulatory attention (which is and should be focused on maintaining trust in the financial system and protecting investors).

There are different interpretations of what is and is not Shari'ah-compliant, although most scholars agree on most of the key points in Islamic finance. For investors, it is important to have a fatwa attached to the product and AAOIFI provides standards already on the board composition and may also provide more input on the Shari'ah standards themselves.

The national regulators are concerned with the financial activities occurring within their borders and if Islamic finance is a significant part of this mix, then the regulators can take steps to set minimum standards (whether that is through a national Shari'ah body or by setting minimum standards of qualification for Shari'ah scholars. A regional body to develop consistent standards about what is and what is not Shari'ah-compliant is unnecessary.

It would create another set of different standards in a region which is already fairly unified on what is and what is not Shari'ah-compliant. If common standards are to be beneficial, they should proceed through already established organizations like AAOIFI, which despite their poor record on making their decisions available to the general public, are already established and credible. They have become more involved with the Shari'ah standards, in addition to their primary roles setting standards of accounting and auditing.

Shari'ah-compliance should not be minimized in terms of its importance to the Islamic financial industry, however, it should not be institutionalized yet. There are still too many areas where new ideas can benefit, either by developing solutions to problems like liquidity management or by finding suitable alternatives to the oft-criticized reliance on murabaha and tawarruq. This is best left to individual institutions and their Shari'ah boards. There may be a time well down the road (the reports are that this Shari'ah board would not be operational for at least 5 years), but we are far away from that point now and there are more pressing issues to deal with now.