The lack of standardisation in Islamic finance is a significant constraint on the industry's growth and progress will be slow, according to Fitch Ratings.
The ratings agency said greater harmonisation of sharia codification within and between jurisdictions is often cited as a limiting factor if Islamic finance is to gain wider acceptance among regional and international investors.
Dubai, through its Islamic Economy Development Centre (DIEDC), is aiming to become the global capital of the Islamic economy and has reported "remarkable progress" in Islamic finance, halal trade and industry, and Islamic lifestyle.
Fitch said in a statement that as well as sharia, it sees product structure and documentation, supervisory and regulatory frameworks, law and dispute resolution, and financial and accounting reporting as the main areas where standardisation would be advantageous.
"In some cases, there is still little standardisation even at a local level, while in others, progress would be needed on a regional, or international, basis," Fitch said.
It added that Malaysia is the most standardised market in the Islamic finance community and remains one of the most innovative.
Standards in regulatory and legal areas, which aim to describe rights and obligations under all circumstances, would support consistency, strengthen supervision and enable the industry to move to the next phase of its development.
This would be particularly important for driving corporate sukuk issuance locally, regionally and internationally, which is dominated by sovereign issuance.
New sukuk issuance with a maturity of more than 18 months from the Gulf Cooperation Council (GCC) region, Malaysia, Indonesia, Turkey and Pakistan totalled $49.6 billion in the first nine months of 2017.
Fitch added: "While there is broad agreement on key sharia principles, their interpretation and the process for assessing compliance can vary significantly. Malaysia's centralised sharia supervisory board warrants all sukuk are compliant with nationally accepted principles.
"GCC member states, on the other hand, leave the question of compliance to sharia boards of individual financial institutions and sukuk stakeholders, which leave the door, open to divergence in sharia rulings and interpretation.
"There has been progress recently in some GCC countries, most notably Bahrain's creation of a central sharia board, which supervises Islamic finance product development and provides guidance to the central bank. However, there is still limited clarity on these initiatives' mandate and influence."
Fitch said these differences in interpretation can deter investors, especially when combined with similar variation in laws and their application, and the lack of legal precedence for effective enforcement of creditor rights in many jurisdictions.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
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