Lack of sharia standard limiting Islamic funds - BNP

ISLAMIC FUNDS: Lack of standardisation hampering industry's growth says BNP. (Getty Images)

A lack of standardisation in products' compliance with Islamic law is limiting growth of its fund industry, a banker at French lender BNP Paribas has said.

The Islamic finance industry is governed by a patchwork of national regulators, standard-setting industry bodies and Islamic scholars ruling on products and contracts.

Investors' views on which products comply with Islamic law, or sharia, differ in particular between its three main centres, South East Asia, the Gulf Arab region and Europe.

Jacques Tripon, global head of Islamic banking at BNP Paribas said these divergent views were the reason why Islamic funds remain small in size.

"We are in asset management but it's difficult to set up a geographically diversified Islamic asset management fund, for example Islamic loans or sukuk," he said.

Islamic funds could in particular play a crucial role in the market for sukuk, or Islamic bonds, which in the Gulf Arab region has seen only sovereign or quasi-sovereign issuers in 2009, after global issuance fell by more than half last year.

Most sukuk have been bought by financial institutions holding issues until maturity, and retail investors accessing the market through fund managers could provide the secondary sukuk market with more liquidity.

Bahrain-based Islamic investment house Tharawat said last week it planned to raise $100 million by year-end for such a sukuk fund that aimed to buy into sukuk issues on the secondary market.

Several other Islamic banks have also started sukuk funds or are in the process of launching them, as investors in the Gulf Arab region are looking for new asset classes besides equities and battered regional real estate.

Tripon said the announcement of Bahrain-based AAOIFI -  the Accounting and Auditing Organization for Islamic Financial Institutions - that said last month it would start monitoring Islamic products in the absence of an industry watchdog was a "very good move".

"We need more standardisation, for instance what is accepted in terms of tawarruq in Malaysia is not accepted here," he said.

The tawarruq financing tool is widely used by Islamic banks, but there has been a recent debate on some of its structures, after Saudi-based industry body International Fiqh Academy ruled they were "a deception" to work around the Islamic ban on interest. (Reuters)

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