Into the great unknown

Financial institutions in the region need to be ready for developments in law, regulation and Sharia standards.

It is tough enough to plan for the future in an established industry based in a mature market, but it is almost impossible in the Gulf's financial sector.

Last year's announcement by Sheikh Muhammad Taqi Usmani, chairman of the Sharia board at AAOIFI (the Accounting and Auditing Organisation for Islamic Financial Institutions) that he considered capital-protected sukuk structures to be in violation of Sharia principles has sent shockwaves through the Islamic finance industry. Delegates at the recent Takaful 08 conference in Bahrain expressed concern that other widely used Islamic finance products could be the next to be discredited by industry bodies.

This has caused uncertainty and could slow the growth of Islamic finance: no one wants to invest in developing new products if they might later have to be withdrawn. The continuing move towards a common set of Islamic finance standards, however, led by Bank Negara Malaysia in the East and by bodies like AAOIFI in the Gulf, looks like it could clarify the situation in the coming years.

It is incredibly difficult to plan for future changes in the law. Mortgage providers in Saudi Arabia opened for business before the Kingdom's mortgage law was put in place; properties in Dubai were sold to foreigners on the understanding that they would be transferred into the buyer's name when the law allowed it; and Emcredit, intended to be the UAE's first credit bureau, was established in 2006, only to spend months in limbo when the government decided a federal credit bureau was needed.

There are bound to be further changes in the law after GCC governments indicated they are committed to a single currency, presumably with a common legal and regulatory framework for the financial sector. Many of the laws and regulations being formulated today could yet end up being rewritten or scrapped in a few years' time.

With so much uncertainty surrounding the region's legal framework and Sharia compliance, coupled with the ever-changing nature of a booming economy, financial institutions have to prepare for factors that might affect their business. Many of these are beyond their control - inflation springs to mind - but some can be influenced.

The Central Bank of Bahrain, Dubai International Financial Centre and Qatar Financial Centre all have transparent systems for consulting on proposed new regulations, allowing financial institutions to have their say before rules are finalised.

When it comes to Sharia guidelines, there are signs that the GCC - and perhaps the global Islamic finance community - is moving towards a common set of standards. Banks and other finance providers need to ensure that they are involved in the debate and have the chance to steer it.

Daniel Stanton is the editor of Arabian Banking & Finance.

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