Regional Islamic Integration

Since their inception, Islamic financial institutions have received their guidance from religious scholars that sit on sharia supervisory and advisory boards. These sharia boards are responsible for determining which financial or banking products and services are in accordance with sharia principles and are therefore suitable for practice. They ensure conformity to the sharia principles and the model of these boards is different in different regions. For example, the GCC has a relatively decentralized sharia governance framework when compared to countries like Malaysia, where the central bank has its own sharia supervisory board and every other Islamic bank is bound to the decisions and rules it sets forth. The roles of these boards include sharia pronouncement, supervision, and review, otherwise known as fatwa, raqabah, and mutabaah, respectively.

While these sharia supervisory boards are given a solid foundation from the Koran of what is a suitable banking practice and what is haram, there is a still a large gray area regarding many technical banking details, as modern banking has simply grown far too complex to be completely guided by a set of overarching principles. This is where interpretation enters the picture on behalf of the sharia supervisory boards. While it is customary to expect that different boards comprised of different people will reach different conclusions and enact different policies, these varying policies, while not an inherently insurmountable barrier to the growth or proliferation of Islamic finance, pose problems of cohesion among Islamic financial institutions that operate in different countries. The differing interpretations of what is sharia-compliant and what is not have interesting implications for the Islamic banking institutions that operate within this sphere. Simply put, and this is especially true of the GCC region in particular, sharia supervisory boards would benefit from creating a more integrated Islamic banking framework that could extend across countries and raise the already burgeoning profile of Islamic banking by facilitating an easier transaction regime between Islamic financial institutions.
Total Return Swaps are a good example in this regard. Some Islamic financial branches utilize waads to offer a sharia-compliant version of Total Return Swaps, while some others are strong opponents to waads and forbid their use because they see them in conflict with sharia principles. Thus, a prospective client may be able to have access to a waad instrument in one country, only to see that same instrument banned in a neighboring country or even in a different bank within the same country.

The idea of uniting the GCC under one centralized sharia board has been under discussion for years and steps have been taken to realize this goal. There are various international organizations that are based around standardizing Islamic finance. The Bahrain-based International Islamic Financial Market organization is working to this end and has many different central and state banks among its ranks. In 2009, the United Shari’ah Board was established in the UAE, replete with Islamic scholars from Kuwait, Saudi Arabia, and Qatar. The idea behind the creation of these entities is that the involved scholars will take the agreed-upon rulings back to their home countries, thus creating some conceptual cohesion in their wake. Some critics of Islamic finance have blamed the lack of a cooperative framework as the single greatest inhibitor and hindrance to the creation of standardized Islamic financial instruments.

While implementing a regional sharia-compliant set of guidelines may offer a wide array of benefits and assist in growing the financial strength of the region’s overall banking sector, which is among the least competitive banking sectors in the world, many doubt the efficacy of such a proposal. Lloyd Maddock, the CEO of Ahli Bank, echoed this sentiment when he told TBY that “Having one set of standards is unlikely because each country’s central bank has its own scholars and sharia board whose interpretations sometimes differ.” These entities are certainly a positive steps toward tackling this issue, but they are far from bringing about a regulatory regime change. Various scholars have speculated that it will take at least 10 years until GCC countries adhere to regionally set regulations. A popular counterargument to a regional sharia board is that it will run into the familiar problem of lacking the power of enforcement. Bringing the regulations under one standard across the Gulf could fundamentally change Islamic banking, certainly for domestic banking actors here in Oman. The Sultanate, as a relative latecomer to the Islamic financial game, would also have the path of least resistance when adopting to newly instituted Gulf-wide regulatory Islamic financial measures.