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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

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