Tuesday, January 8, 2013

London the key to setting regulatory framework

By Farah Saad

London could be the key to resolving the issue of finding a standardised regulatory framework for cross-border trading in Islamic finance.

The city’s positioning, both historically and within the Islamic trade route, gives it a neutrality which could help in setting a framework, according to UK-based Gatehouse Bank plc chief executive officer (CEO) Richard Thomas.

“In London, we work with both the Gulf and Malaysia and it seems one of the things that London may be able to contribute is assistance with standardisation, because English law is the best current legal structure within which to manage Islamic contracts.

English law accommodates all of the Shariah principals,” he told The Malaysian Reserve in a recent interview.

London was also one of the pioneer non-Muslim cities to adopt Islamic finance more than 30 years ago, said Thomas.

Critics and supporters of Islamic finance alike have often pointed out that cross-border trading in Islamic finance is less regulated compared to conventional finance.

“I would say that these problems are exaggerated because the vast majority of the contracts are standardised, but there are some areas that need to be worked on. Murabahah and sukuk is a controversial area between schools of thought, but scholars discuss matters regularly and more often than not, reach a favourable conclusion,” said Thomas.

Cross-border Islamic financial instruments are expected to result in a greater rate of litigations compared to their local counterparts since the former involves contending parties in different jurisdictions where Shariah and legal interpretations have a greater divergence, suggested a paper presented at an Islamic banking and finance conference organised by the International Islamic University Malaysia (IIUM) in 2010.

The paper highlighted the cases of Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and others, and that of Tajik Aluminium Plant v Ermatov and others in the English courts, evidenced the existence of Shariah and legal issues with regard to Islamic financial instruments.

“Even when these instruments involve parties in a particular jurisdiction, both Shariah and legal issues arise. The former relates to the interpretation of the Shariah while the latter involves the correct administration of the law,” the paper argued.

In a recent interview with the media, Dubai-based Fajr Capital Ltd CEO Iqbal Khan pointed out the existence of variation in regulatory frameworks, which are then further distorted by history and market dynamics.

“Cross-border transactions play an increasingly significant role in the Organisation of Islamic Cooperation (OIC) economies.

“Despite showing an upward trend, intra-OIC merchandise trade growth is not as rapid as the growth in Islamic finance itself,” he said in a panel discussion at the recent Bank Negara Malaysia-hosted Global Islamic Finance Forum (GIFF) 2012 in Kuala Lumpur.

Thomas said there is a myth, or a misconception, that conventional finance is more regulated or more standardised.

“Its just an easy target for critics to point out but you have to think about how long conventional finance has taken to get where it is today, compared to Islamic finance, which has been around on a global level for only 30 years.

“The different schools of thought actually encourage growth by creating more products,” said Thomas.

The cost of capital for Islamic finance, which has often placed it at a disadvantage in the past, has gone down, making it more accessible. Asia has also become a source of liquidity for countries who traditionally leverage by conventional means.

“The credit crunch and the recent turmoil has restricted conventional banks’ ability to leverage. It’s all invented money and they can’t do that now.

“Because of that, Islamic capital has become more price efficient,” he said.

Gatehouse Bank, established five years ago, is a London-based Islamic bank with Kuwaiti shareholding.

The bank acts as a middleman for funds from Malaysia’s Permodalan Nasional Bhd and Employees Provident Fund, which it invests in its real estate holdings in London, along with its capital market products and treasury products.

To date, its assets under management total £1.5 billion (RM7.4 billion), with a paid-up capital of £150 million pounds.

[The Malaysian Reserve, 15 Oct 2012]