In the aftermath of the global financial crisis, the prospects for Islamic finance appear brighter than ever. The industry boasts an estimated $1 trillion in assets, and Islamic banking — untouched by subprime-mortgage-backed securities and other toxic assets that devastated many Western institutions — continues to grow at a rate of about 20 percent a year. Financial centers from Bahrain and Dubai in the Persian Gulf to Malaysia and Singapore in Asia are moving to improve their regulatory frameworks in a bid to win a bigger piece of the pie.
Yet much of the industry’s potential remains untapped. And the competition itself may be part of the reason, bankers and analysts say.
A lack of consistency in the interpretation of Islamic law by scholars who decide if a product complies with shari’a principles is holding back the development of a vibrant capital market and asset management business. The industry must resolve differences between the secular element of contracts frequently based on English common law and a shari’a board’s interpretation of the same contract if conventional money managers are to see long-term value in Islamic finance, an essential element for future growth. Among other things, shari’a bans the charging of interest and requires that loans be structured on a profit-sharing basis.
“There is a need for standardization and uniformity,” says Arul Kandasamy, head of investment banking at Abu Dhabi Commercial Bank. “We cannot rely on shari’a scholars, as they have a vested interest in retaining the status quo. Governments and regulators have primary responsibility for resolving this situation.” Similar concerns temper the optimism of Mohieddine Kronfol, managing director of Algebra Capital in Dubai. “Shari’a-compliant assets are more than $1 trillion, but legal and market infrastructure as well as corporate governance standards are current and very relevant challenges facing Islamic finance,” he says. ....