DUBAI (Reuters) – Dubai’s debt woes underscore the need for regulation and restructuring in the Islamic finance industry, said experts speaking at Reuters Islamic Banking and Finance Summit in Dubai.
Repayment fears about the sukuk, or Islamic bonds, issued by Dubai World’s property unit Nakheel put Islamic finance on the global stage and tarnished an industry that had been expected to remain buoyant even as conventional banks slowed down.
State-linked Dubai World shook global markets in November with plans to request a delay on repaying $26 billion in debt. It staved off default on a $4.1 billion Islamic bond linked to Nakheel after a last-minute bailout from Abu Dhabi.
The industry must create guidelines to prevent the type of uncertainty investors had over the structuring of Islamic finance products and the underlying assets that are used to create them, said Mohd Daud Bakar, an Islamic scholar.
“We need to have in place by regulators what we mean by asset-based and asset-backed (securities),” Bakar said. “We need more transparency and regulation. That’s the missing link in this part of the world.”
That is not an easy task, given that the Islamic finance industry spans the globe and is under jurisdictions with differing interpretations of sharia law.
Malaysia, for instance, is considered to be more liberal in its view of sharia compliance, while Saudi Arabia has much stricter rules on what is allowed and what is prohibited.
Bakar said that each country should start a domestic dialogue to answer basic questions of transparency before moving on to an authoritative regional body.
He added that a central regulatory body may be a solution down the road to help lenders have someone to turn to with questions of restructuring a sukuk. It could also serve as a “quasi-government” entity, armed with the mission to look after a defaulting sukuk if that happens, Bakar added.
Currently regulation is divided between central banks, standard-setting bodies and scholars.
CENTRAL REGULATION COULD STIFLE GROWTH
Because the Islamic finance industry spans the globe and is under jurisdictions with differing interpretations of sharia law, guidelines to prevent uncertainty for investors are seen as necessary.
However the idea of a central authority does not appeal to everyone.
“It would stifle growth in the industry,” said Harris Irfan, head of Islamic products at Barclays Capital. “We are at a stage of creating things and if we had to go to a public sector regulator for approval on everything, there wouldn’t be any business.”
“It would be paralytic,” Irfan added.
Peter Casey, director of policy at Dubai Financial Services Authority, said the role of a financial regulator in conventional and Islamic banking is to make sure that a company can pay its debt when it is due and maintains ethical conduct in business, including disclosure practices. It can also engage in product regulation.
But to ask a regulator to determine sharia-compliance would be difficult, as scholars themselves are divided.
“The industry has to help bring the scholars together and get a consensus among them,” he said. “But I don’t think financial services regulators can impose a consensus except locally where none exists.”
In the meantime, it is up to financial institutions to revisit their Islamic finance contracts and restructure them in a way to make sure that they are clear to all parties involved.
Muneer Khan, partner at Simmons & Simmons, said he is seeing an increase in demand from financial institutions to make sure there is “as much transparency as possible about structures and associated risks.”
He added that advisors working on corporate restructuring must be even more diligent about assuring that restructured transactions continue to be sharia compliant going forward.
“There are standards in sharia compliance right now which are as close as you’re going to get to a global sharia standard,” Khan said. “It may not be perfect but it’s a good starting point.”