Abu Dhabi further standardising oversight of Islamic financial services

 

The rapidly expanding Islamic finance industry is still a relatively new component of the world economic system. The regulatory frameworks that govern it, therefore, show a high degree of variation from one jurisdiction to the next. Almost all of them, however, fall within two broad models: a centralised system, with some form of higher sharia authority to issue regulations, or a self-regulation model, where Islamic finance institutions turn to their own sharia supervisory boards (SSBs) for rulings on new products and services. The relative merits of these differing approaches have been the subject of a lively debate for many years.

Proponents of the SSB system argue that it has allowed banks to accelerate product development and drive growth in the industry. Those advocating a more centralised approach maintain that the increasing complexity of the sector calls for a more coherent regulatory process to safeguard its continued expansion. The UAE has been at the forefront of this global conversation, and with Islamic banks holding approximately 22% of domestic credit at the outset of 2016, its voice within the industry is an influential one.

Current Status

The sharia-compliance of Islamic banks, insurers and investment houses in the UAE has, to date, been overseen by their own SSBs. Islamic institutions have therefore benefited from the dynamism of this system. Being able to submit product innovations to proprietary sharia boards is usually quicker than gaining permission from a centralised authority, which is an important factor in the context of an industry competing with conventional institutions. A decentralised system also allows for more instances of ijtihad – the process of interpreting Islamic law and coming to a decision – by encouraging an intellectually richer environment that is more conducive to product innovation.

However, the establishment of a centralised industry authority has been on the UAE’s agenda for some years. The idea gained momentum in 2015 when the UAE Banks Federation, the nation’s banking industry representative body, discussed a proposal to establish a Higher Sharia Authority. A federal decision was made in May 2016, when the UAE Cabinet approved the creation of a centralised sharia authority mandated to monitor, and set standards for, the nation’s Islamic finance industry. The Central Bank of the UAE has been charged with the task of designing and establishing the new body.

Implications

The UAE is not alone in adopting a centralised approach to sharia regulation. Oman, Bahrain, Pakistan, Morocco and Nigeria have all recently moved towards similar systems. The decision of the UAE Cabinet will satisfy those who have argued that the absence of a governing sharia body limits the standardisation necessary for an efficient industry, as interpretations of some of the finer points of Islamic law differ from one institution to the next. This argument has gained strength as the industry matured; with most of the standard banking operations already translated into the sharia context, the focus of the industry has moved to more complex areas such as sharia-compliant repurchase agreements and profit rate swaps.

The adoption of these processes by the Islamic finance industry has been patchy, and the need for clients to clear transactions with every company involved in multi-institution deals is labour intensive and time consuming. A higher sharia authority could bring clarity to complicated areas such as these, an advantage noted by the consultancy Deloitte in a recent report on the industry: “Developing the dispute resolution process for sharia-compliant transactions, establishing a federal-level sharia board and allowing primary sales of sukuk (Islamic bonds) to retail investors could further support debt market growth.”

There is no doubt that many questions have yet to be resolved – in particular, how the new body will interact with proprietary boards when there is a conflict in sharia interpretation. Nevertheless, Abu Dhabi’s Islamic finance institutions will be creating and marketing products according to a new framework in the near future.

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The Report: Abu Dhabi 2017

Islamic Financial Services chapter from The Report: Abu Dhabi 2017

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