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17 August 2013

Islamic industry body consolidation?

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By Rushdi Siddiqui

Hussein Al Qemzi, CEO of Noor Islamic Bank and Noor Investment group, recently made extremely important comments concerning the need for a definitive industry body to promote and regulate Islamic finance.

He said: “... it is a real concern that there is no authoritative global body to regulate and promote Islamic finance… Disagreement and different interpretations, over what is Shariah-compliant and what is not, continue to make it difficult to establish the necessary regulations for the industry to develop globally accepted products… Some people argue that standardisation is an unrealistic goal, given the fragmented nature of Islamic finance. I do not agree. There is a need for balanced, globally accepted, regulation that does not impede growth, or allow for abuse.”

Outside box thinking

Sometimes solutions require (way) outside the box thinking. For example, what if we take a chapter form the merger and acquisition arena and apply to Islamic finance industry bodies, hence, to achieve the ‘definitive, authoritative industry’ body requires consolidation.

The industry bodies include Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), International Islamic Rating Agency (IIRA), International Islamic Financial Market (IIFM), and General Council for Islamic Banks & Financial Institutions (Cibafi).

Consolidation makes sense when and where there are cost savings synergies. It makes sense when there is an overlap of founding shareholders, when same scholars sit on boards of various bodies, when there are resource constraints resulting in operational challenges and hiring qualified human asset, and so on.

Finally, consolidation may make sense when the need of the hour is an industry body that sees the bigger picture and where it fits in as an important stakeholder in Islamic finance versus the present “silo” approach.

Founding stakeholders

If we look at the sampling of the founding shareholders of the above-mentioned industry bodies, there is an overlap with heavy weights of Islamic finance including Islamic Development Bank, Al Rajhi, Albaraka, and Kuwait Finance House.

The vision for Islamic finance at conception time these alphabet organisations were launched — 1991 (AAOIFI) to 2005 (IIRA) — to now has changed dramatically. The times have moved on and the bodies need to also stay relevant.

The IIFM website, meanwhile, states its mission as: “... the global standardisation body for the Islamic Capital & Money Market segment of the IFSI. Its primary focus lies in the standardisation of Islamic financial products, documentation and related processes.”

But, the question is wouldn’t it make more sense and be more efficient for IIFM to work under the umbrella of an industry-setting body that produces standards requiring standardisation?

Cibafi chairman in its message on its website states that Cibafi was established for two major roles — support and protect the industry. Support the industry through awareness and training, holding conferences, seminars and forums and providing the necessary information. Protect the industry so as to avoid, as much as possible, the obstacles and deviations in the course of the Islamic finance industry.

Wouldn’t it make more sense to bring Cibafi under the umbrella of an industry body that produces standards that are followed by training, seminars, and work-shops on them?

Finally, the most prominent Islamic finance industry body is the Bahrain-based AAOIFI.

Its website states: “AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shariah standards for Islamic financial institutions and the industry. Professional qualification programmes (notably CIPA, the Shariah adviser and auditor “CSAA”, and the corporate compliance programme) are presented now by AAOIFI in its efforts to enhance the industry’s human resources base and governance structures.”

AAOIFI is best positioned to be the umbrella Islamic finance industry body in the Gulf Cooperation Council as its standards become standardised documents (IIFM) with process review (IIRA), and are promoted and protected with the understanding (Cibafi).

One window shopping

For example, consolidation results in one Islamic finance conference event with all the four bodies under one roof, and taking place in various Islamic finance hubs to educate, make aware and demystify.

The combination then results in a four-by-four Olympic relay race, where the baton is internally coordinated from each of the bodies.

Looking ahead, after AAOIFI “acquires and integrates”, there needs to be discussions for a merger of equals with Malaysia-based Islamic Financial Services Board (IFSB), with a “one stop shop” for standards and prudential regulations.

The chairmen of these industry bodies need to put aside their egos for a bigger cause — to promote and protect Islamic finance under one industry body.

[Rushdi Siddiqui is co-founder and MD of Azka Capital, private equity advisory firm focused on halal industry initiatives. He is also an advisor to Thomson Reuters on Islamic finance and halal industry.]

(Courtesy: Khaleej Times)

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