The boss of the international standard-setting organisation for Islamic finance tells us why the $1trillion industry is set for even greater things.
Arriving at AAOIFI, you might be forgiven for thinking you've wandered into the wrong office. Situated in a relatively low-rise tower a few floors above a nondescript shopping mall in the Manama Souq district, the group's headquarters are somehow at odds with its position as one of the most powerful players in 21st century finance.
There are no marble halls, no battalion of secretaries, and probably no multimillion-dollar bonuses: for an institution with an indirect yet significant say on hundreds of billions of dollars, AAOIFI's official presence is so low key as to be beyond the range of human hearing. A good job, then, that its reputation is established around the globe.
The Accounting and Auditing Organisation for Islamic Financial Institutions, to give its full name, is the international standard-setting organisation for Islamic finance. Its scale of influence is unparalleled in the world of Sharia-compliant banking, an industry whose assets are expected to surpass $1 trillion globally before the year is out.
When AAOIFI speaks the markets listen, and when secretary general Dr Mohamad Nedal Alchaar offers his thoughts, industry professionals hold their breath from Bahrain to Brunei. Founded in 1990 as an independent body to regulate and standardise the Islamic banking and finance industry, AAOIFI has since issued 81 standards in five areas: accounting, auditing, governance, ethics and Sharia.
The body also runs professional qualification courses to train professionals in both finance and Islamic finance, and plays a consultancy role with governments, authorities, and banks on conversion to Islamic finance or initiating Islamic finance in different countries. So far, more than 15 countries around the world have taken advantage of the service.
"There is no equivalent in conventional banking, in terms of our scope and the wide responsibility that we have," says Alchaar proudly. "Such a wide scope is unique to AAOIFI, maybe because the industry is still young, and we need to have an authority that takes on a general view. When you regulate an industry and make it systematic, people will come in, increasing the credibility," he says. "You are making a complete system, and a complete system is usually a safe system. AAOIFI's role in making a safe system was huge; it was, I think, the leading role."
According to AAIOFI figures, the Islamic finance industry has grown at an annual rate of 30 percent over the past eight years. It forms as much as 20 percent of total banking assets in major markets, and has the potential to grow 30 percent in each of the next three years.
With this in mind, Western banks from all over the world are sending their staff to be trained in Islamic finance. And AAOIFI is playing its part, having graduated more than 700 candidates from its licensed training centres in Saudi, Kuwait, and Syria, as well as Europe and South Asia.
Nevertheless, there remains a significant risk of banks using untrained staff to tap the Islamic finance market. "We see people who don't understand Islamic banking at all and only came to it because it's finance, thinking that there's an opportunity," warns Alchaar.
"At one point in time before our standards were widely implemented it was threatening, because we observed many incidents where conventional products were mimicked," he continues. "They were conventional but they were played with to become Islamic, just on the surface, nothing real. A lack of unified supervision means that it is still there, and I am sure people are exploiting the system just to make money."
The temptation must be significant. Islamic finance is, after all, an industry that represents 1.6 billion Muslims worldwide. It is providing opportunities to vast swathes of the population who might never have dreamed of dealing with a bank. And for those institutions to adequately satisfy the demands of a growing customer base, they must embrace transparency or risk running aground."I think we have to improve our transparency and our assessment of our financial positions," suggests Alchaar. "The lack of transparency that you hear about in this part of the world I think is due to the nature of our corporations. Most of them started as family-oriented firms and then slowly but surely progressed to be public corporations," he continues. "In this interim period you will always have some imbalances but I think you will see more transparency in the future. It's a generation thing."
Alchaar does admit that there is a geographical "disparity" in the Islamic finance world - cultural and political differences can mean that one region's standard practice is another's violation of Sharia principles. And with structured deals becoming ever more complex in nature, he adds that it is becoming easier for "unintentional" mistakes to pass unnoticed. "We are a bit worried about structured deals and would like to make sure these deals meet up to our standards," he says carefully. "In deals you don't follow the standards literally, you have to innovate. Sometimes the deal is so complex you make a mistake without even knowing it.
"The goal is to promote sound practices, not to catch people, and the most important thing is credibility," he adds. "If this is going to spread and really serve the world and the public, not only Muslims, then it has to be done right. It has to be honest, straight and transparent. In money you always have to be honest, because you cannot repeat your mistakes. People will shy away, leave you and drop."
AAOIFI has first-hand experience of what can happen when customers lose confidence. In November 2007 Sheikh Muhammad Taqi Usmani, chairman of the AAOIFI board of scholars, claimed that 85 percent of Islamic bonds (sukuk) are not Sharia-compliant. He argued that they were structured too much like conventional bonds - and the condemnation sparked chaos in the international market.
"In principle he [Sheikh Taqi Usmani] was right, but the statement was taken out of proportion," insists Alchaar. "When he said 85 percent of the sukuk are non-compliant, he meant the non-hijara sukuk, which comprise only 30 or 35 percent of the whole industry. So he was talking about 85 percent of 30 to 35 percent, not 85 percent of the whole sukuk."
In Alchaar's estimation, every sukuk issued today is Sharia-compliant. Nevertheless, the fallout generated by the chairman's proclamation has been credited by many with prompting a significant drop-off in sukuk issuance. According to ratings agency Moody's, issuance of sukuk fell by more than 50 percent in 2008.
"Some people attributed the slowdown to the [Sheikh Taqi Usmani] statement, but in my opinion the fact that it coincided with the downturn had a lot to do with it," says Alchaar. "There might have been some reluctance on behalf of buyers after the statement but it's difficult to judge."
So are the scholars a difficult bunch? Alchaar laughs and shakes his head: "Not at all. The scholars disagree but that is the nature of the Islamic school of thought," he insists. "Those variances are not instrumental - they are more in form than in substance, so we're not very worried about them. Reaching a consensus is possible, and AAOIFI is an example of the ability to reach consensus."
From faith back to finance; Alchaar is adamant that the current economic climate has had little effect on AAOIFI's operations. While he admits to a "slowdown" in sponsorship, he says that the body is doing "very well" financially, and that companies are still queuing up to be associated with the authority. "Corporations come to us with two goals: one is to help AAOIFI because we are based on memberships and donations, and the other is to present themselves to the public as supporters of Islamic banking and finance," explains Alchaar. "Financially we are completely independent; we don't rely on any specific source and our sources are well diversified. That gives us more independence as well.
"We are supported by over 200 institutional members from over 40 countries, and we are also supported by over 100 professionals who work almost voluntarily for AAOIFI," says Alchaar. "It's a very unique model, whereby people come in just to get associated with the organisation."
Inclusion appears to be the name of the game: of sponsors, of industry professionals, and of customers. Simply, Alchaar insists that empowering Muslims through finance is "the best way to harmonise with everyone else".
"We believe Islamic finance is good for everyone, Muslims and non-Muslims alike," he offers. "You can manage, own, invest and do everything in Islamic finance as long as you adhere to the principles.
"When you empower poor Muslims and you provide better living standards for poor Muslims most likely they will harmonise with others, understand others," he continues. "There's a human message there, not just a financial message, at least that's how I understand it."
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