"No one doubts that there is a need for improved regulation and the streamlining of cross-border issuance of, for example, Sukuk. However, what the industry needs more is global standardization, not just standardization across the GCC, which is already very homogenized in its regulatory and Shari'ah regimes. The initiative - which does deserve some applause - does however run the danger of becoming a noisy sideshow, when the real challenge lies in finding a global language for Islamic finance - not creating another regional hub 300 miles away from one of the global centers for the industry. With emerging markets in Africa and Central Asia coming to the Islamic finance party, the industry needs one coherent voice - one leader - not three disparate voices calling from different directions."I am mostly in agreement with his sentiment. The idea of Shari'ah standardization--while tricky--is necessary in some areas of Islamic finance. In the retail world, it is mostly unnecessary because retail banks are focused on their customer's demand and the prevailing Shari'ah standards in the countries where their customers are located. However, even in retail banking, using an interpretation of Shari'ah-compliance that differs in significant ways from the prevailing interpretation elsewhere could hamper the ability of the bank to raise capital needed to sustain and grow its business, unless this comes exclusively from regions that use the same Shari'ah standards.
However, the problem becomes much more significant when cross-border products are developed. These cross-border products will be limited significantly if large regions--for example the GCC--operate with a different understanding of Shari'ah-compliance. This was in part the case in the oft-mentioned difference in Shari'ah standards between the GCC and Malaysia. Many contracts used widely in Malaysia are not permissible under the standards used in the GCC and so the Islamic finance industry in Malaysia developed with a much stronger domestic focus than the GCC. This may have been fine when Islamic finance began to grow during the 1980s and 1990s, but as Islamic finance becomes more globalized, Malaysia has begun to reduce the use of contracts which are problematic. The best known effort to bridge the gap was the sukuk ALIM, developed jointly by Cagamas, the national housing agency, and Al Rajhi Bank, the Saudi Islamic bank which is one of the largest Islamic banks in the world.
I think this is a good example of the types of Shari'ah convergence which is beneficial--not just GCC/Malaysia convergence, but globally. Institutions and their respective Shari'ah boards working together to develop products that are globally accepted. This--rather than an intra-GCC Shari'ah board--should be the focus. It can, as I suggested in my earlier post, be moved under the banner of a standards setting body like AAOIFI or the IFSB or within the Islamic Development Bank, but the inter-regional differences are likely to be greater than intra-regional differences. These differences will also pose the greatest risk to the continued globalization of Islamic finance.
Whether you believe Shari'ah standardization is a fruitful exercise or not, the focus should be on bringing in regions that are diverse, not focusing on the regions where Shari'ah standards are already mostly the same.