Islamic finance 2.0, regulation 1.0
Trading in Shariah-compliant products is about to enter a new age. But as the controversy over the Nakheel sukuk illustrated, the industry is still mired by a lack of transparency.
February 16, 2010 9:22 by Ben Flanagan
But others point to some major flaws in the Islamic finance system as it currently stands.
For example, the system does not have a unified regulatory framework, and there is a lack of clarity of definitions of some of the associated instruments. According to a senior industry figure quoted by Reuters, failure to address this could have dire consequences for the industry: “Clarity on the structure is essential. The Islamic finance industry must do all it can to avoid accusations of mis-selling products,” said the unnamed industry figure.
While the Accounting and Auditing Organization for Islamic Financial Institutions, the international standard-setting organization for Islamic finance, has taken steps to harmonize Islamic finance practices, others point to a discord in the standards, disclosure, transparency and market practices. Dr. Nik Ramlah Mahmood, managing director at the Securities Commission in Malaysia, recently said that “it is critical that we safeguard confidence in the Islamic financial system through promoting greater standardization in documentation, providing greater legal and regulatory certainty and high levels of transparency.”
More information is clearly key to improving transparency and regulation in Islamic finance. The new Thomson Reuters Islamic Finance Gateway aims to address this: The platform contains financial news, information, plus links to Shariah scholars and standards bodies, as well as being a trading platform.
Rushdi Siddiqui, global head of Islamic finance at Thomson Reuters, said the gateway will bring the kind of information “to the high standards as you find in the Western markets”, in what’s billed as heralding “Islamic Finance 2.0″.
But it may take Regulation 2.0, as well as Transparency 2.0, to restore confidence in the Islamic finance sector – and even this is unlikely to prevent the expected wave of defaults this year.