Winter 2012

INSIDE VIEW: To standardise, or not

Wall2A new Malaysia-based Islamic finance body – the Association of Shariah Advisors in Islamic Finance – has recently proposed to develop a global code of ethics and a professional development programme for scholars to address a lack of standardisation in the industry. Shahrin Shaikh Mohd of Hwang Investment Management discusses the implications.

The lack of a pre-agreed standard has been a stumbling block for this industry and by recognising this, we must address this long-standing issue and move forward.

The cultural and economic diversity globally in itself is a challenge and we do not foresee a common standard per se. For instance, there are mainly four schools of thoughts in Islamic jurisprudence – namely Hanafi, Maliki, Shafi’i and Hanbali – and each of these schools of thought has its own set of scholars and interpretation on Islamic finance principles.

It creates ambiguity and conflict on the veracity of a transaction in terms of its compliance with the sharia. However, like its conventional peers, a more realistic form of standards will be in the form of recognised differences in which best-practices are incorporated and divergent ones, eliminated from the system.

This will be a more pragmatic approach to creating a platform on which different countries that have different practices can agree and work towards building mutual global and recognisable standards participating countries can adapt to.

This will be the first step towards creating open communication and discussions on how to move the industry forwards rather than to be mired in the same argument of which is better and whom to follow.

Right direction
Such standards are necessary at the international level in building confidence in countries in which such products and services are not native to. Localisation, especially within the Asia region, is still necessary to cater to the cultural differences and this is something specific to Asia in which Western cultures need to understand.

In Malaysia, the establishment of Shariah Advisory Council and, more recently, Association of Shariah Advisors by the Malaysia International Islamic Financial Centre and the Securities Commission Malaysia is a step in the right direction to address this issue.

However, greater involvement between the international financial hubs and co-operation among its regulators would be the next step forward to grow Islamic finance into a global appeal, considering Islamic finance’s $1 trillion assets only make up 1% of the global financial market.

Standardisation means establishing universal and internationally accepted sharia standards, which could address the divergence of sharia interpretations. But product structured to be adaptable to local needs.

Great emphasis needs to be placed on adhering to the stringent sharia investment framework and guidelines. This usually happens via advisers that oversees investment processes and operations.

The aim should be to ensure investors’ risk and returns are managed within the boundary set by the highest sharia investment standard. The sharia advisory team can help providing their viewpoint to ensure what an asset manager offers is relevant and compliant to the different markets.

The latter includes managing currency exchange risks to protect investment returns.

To harmonise both ideals may sound almost impossible as it is contradicting each other on the surface, but we are convinced this can be achieved.

It is vital to increase the marketability and international acceptance of sharia investment products and to do that, a standardised sharia interpretation is already half the battle won as it acts like a global passport to open the door of opportunity. The other half of the battle after entering a market, is to adapt our offerings to suit local needs.

This also encourages innovation and creation of wider breadth of sharia offerings. We know uniformity and adaptability is an act of fine balance, but this is necessary if we want Islamic finance to gain global acceptance and inch up its 1% market share. We still need to cater to local needs.

No doubt, standardising Islamic finance interpretation will take a while to materialise as it is no small feat because it involves changing countries’ legal framework and infrastructure.

If we look closely, most of the major Islamic financial hubs are the Muslim populated countries, but their interpretation of Islamic finance laws and regulatory practices have stark differences.

The lack of concurrence in viewpoints proves to be an impediment to the industry’s growth, but it is also the key to greater global acceptance of Islamic financial products and services.

The debates in which the scholars and industry players are engaging in now mark a good start of this lengthy process of internationalisation. It encourages cross-border marketability, better economies of scale, consistency and improved public confidence. Meanwhile, adaptability of offerings drives the growth Islamic investment’s market share in the international sphere.

Shahrin Shaikh Mohd is chief compliance, risk and legal officer at Hwang Investment Management

©2012 funds global asia

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