gateway to islamic finance interview - Institute of Islamic Banking ...

COUNTRY FOCUS
Mecca
now witnessing growth of Shari’ah-compliant
securities – a trend that Aylward predicts to
continue. In the last three years, Saudi Arabia
has proved to be one of the main players in
the global sukuk market alongside Malaysia
and the UAE. While in 2004 it did not issue
Islamic bonds, by 2006 it accounted for three
percent, and a year later the figure jumped to
eleven per cent, making Saudi Arabia the
third largest sukuk issuer after the UAE (34
per cent in 2007) and Malaysia (31 per cent).
‘The sukuk market is the way to finance
deals, for example, to refinance existing
transactions. The syndicated loans market is
pretty much tapped out in Saudi Arabia.
If you talk to the bankers there, they’ll say
there is only so much left,’ says Aylward.
‘At some point in future, we’ll see the
development of Islamic version of the project
sukuk, although it is still some way off yet.’
The area of Islamic insurance, or takaful, is
also playing a major part, observes
Aylward. According to the country’s
legislation, all insurance companies
operating in Saudi Arabia must comply with
Shari’ah law. ‘Insurance in the Muslim
world has very low penetration, but this is
changing’, says Aylward. ‘The potential for
the industry is big.’
Interestingly, it is not just the country’s
insurance sector that must operate in
compliance with Shari’ah, but the entire
legal system. ‘Out of all the Middle East
nations, in Saudi Arabia the legal system
and the constitution are most closely aligned
with Shari’ah,’ emphasises Aylward.
‘Shari’ah is the law of Saudi Arabia.’
The picture is somewhat different in the
banking sector. The banks, unlike the
insurance operators, are not under the
obligations of Shari’ah compliance. Both
conventional and Islamic financial
institutions are permitted to operate in the
country and they are regulated by the same
regulatory framework. To date, there is no
separate licensing regime for Islamic and
conventional banks. SAMA’s prudential
standards, protections, capital adequacy
procedures, etc. are based on a conventional
banking market. The regulator ensures that
the same level of requirements and scrutiny
is applied in the Islamic space, as well as
conventional. The Saudi banking market is
famous for being very conservative in terms
of capital adequacy and prudential
standards, so it does not really have a high
risk issue.
Shari’ah supervisory boards are a
mandatory requirement for the Islamic
financial institutions operating in Saudi
Arabia. It is up to these boards to decide
what products and services are Shari’ahcompliant.
The model is similar to Bahrain,
where the central bank and regulator does
not centralise the decision-making process
concerning Shari’ah compliance issues of
individual banks and does not interfere in
these processes (for an in-depth analysis of
Bahraini Islamic finance sector, see
NewHorizon, January–March 2007 issue).
This approach is very different to some
other Islamic finance centres, such as
Malaysia, where the Shari’ah board of every
Islamic financial institution licensed in the
country is subordinate to the Shari’ah
Advisory Council for Islamic Banking and
Takaful (SAC). SAC, established by Bank
Negara Malaysia (the central bank and
regulator), is the ultimate authority of
Shari’ah compliance in Malaysia. Before
introducing any Islamic banking product or
service to the market, the board of the bank
passes it to SAC for approval. Once
sanctioned by the central bank and SAC, it
becomes available to all banks to take on
board if they wish (Islamic finance in
Malaysia is examined in NewHorizon,
July–September 2007 issue).
Some specialists think that a somewhat
similar approach should be taken on board by
SAMA in Saudi Arabia. ‘I would like to see
the creation of a unified Shari’ah supervisory
board under the regulator,’ says Dhafer
Alqahtani, co-CEO and CIO of Arbah
Capital, Saudi-based Islamic investment firm,
‘and also the creation of a standalone body
under the regulator for Islamic financial
institutions to supervise their activities.’ He
also thinks there is a need to accelerate the
adoption of AAIOFI standards for all
Shari’ah activities in the country.
26 IIBI