Size matters. One of the most over-used words in Islamic finance is the need for Islamic banks and Takaful companies to consolidate to reach size and achieve scale.
As a larger capitalized entity - a mega Islamic bank - it can better compete with not only the Islamic windows and subsidiaries of conventional banks and insurance companies like HSBC or Prudential, but also eventually the larger conventional financial institutions for mandates on project finance, merger and acquisitions, buyouts, and so on.
Credit crisis I & II has flushed out the systemic risks (measuring, monitoring and managing) associated with mega banks for not just national economies, but also the world economy.
Yet, Islamic finance has been pushing, pitching and prodding for an Islamic mega bank without lender of last resort (central bank?), without stress-testing deposit-taking banks (issues on concentration, credit, counter-party, liquidity, external event shock, and Shari'ah non-compliant risks), without a bankruptcy reorganization code or experience and so forth.
But what about consolidation among Islamic industry bodies, like Accounting and Auditing Organization 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, etcetera, where 2 and 2 doesn't make 5 but 22. 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 the Islamic Development Bank, Al Rajhi, Albaraka, and Kuwait Finance House.
The vision for Islamic finance at conception time these alphabet organizations 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.
On its website, the IIRA states its corporate profile as:
"... the sole rating agency established to provide capital markets and the banking sector in predominantly Islamic countries with a rating spectrum that encompasses the full array of capital instruments and specialty Islamic financial products, and to enhance the level of analytical expertise in those markets.
"IIRA publishes professional analytical research for its multiple constituencies. The research will set a high standard for the market, enhancing the level of understanding of the value of fundamental analysis in assessing default or investment risk. Seminars will be used to teach this type of analysis outside the rating agency."
Today, IIRA does not have history, size and reach to be able to compete with established rating agencies involved in Islamic finance, such as Standard & Poor's, Moody's, RAM Holdings and Malaysian Rating Corp. More importantly, is there any point in reinventing the rating "wheel" as the rating agencies, especially Malaysians, understand quite well the various risks associated with Sukuk contracts, Islamic funds, Islamic banks, and so on?
IIRA may need to look into the process of Shari'ah adherence of Islamic banks, Takaful, leasing, Islamic REITs, and even Islamic stock exchanges (like DFM). The focus on process may result in addressing one of the important issues in Islamic finance, the non-compliant Shari'ah risk.
The IIFM website, meanwhile, states its mission as:
" ... the global standardization body for the Islamic Capital & Money Market segment of the IFSI. Its primary focus lies in the standardization of Islamic financial products, documentation and related processes."
IIFM has done a commendable job on standardization of documentation in an inclusive manner with industry practitioners while working and/or partnering with established conventional institutions like International Swaps and Derivatives Association Inc (Isda).
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 standardization?
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.
Today, there are a number of more prominent institutions, universities and for-profit initiatives, offering Islamic finance certification courses, training, seminars, and conferences. There are many Islamic finance conferences, like the Global Islamic Finance Forum and the Kuala Lumpur Islamic Finance Forum in Malaysia, that have pre and post conference workshops.
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 workshops on them?
Finally, the most prominent Islamic finance industry body is the Bahrain-based AAOIFI, with over 40 standards and nearly 200 members from 40 countries.
On its website, it states:
"AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'ah standards for Islamic financial institutions and the industry. Professional qualification programs (notably CIPA, the Shari'ah adviser and auditor "CSAA", and the corporate compliance program) are presented now by AAOIFI in its efforts to enhance the industry's human resources base and governance structures."
Although AAOIFI is considered the most prominent body for the industry, only a handful of jurisdictions have adopted the AAOIFI standards - including Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan, and Syria?
Has AAOIFI lost focus from its core mandate accounting and auditing of Islamic financial institutions to areas, like, stock screening for Shari'ah-compliant companies?
AAOIFI is best positioned to be the umbrella Islamic finance industry body in the Gulf Cooperation Council as its standards become standardized documents (IIFM) with process review (IIRA), and are promoted and protected with the understanding (Cibafi).
This, for example, 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 much work is done together before the race, and at the event, the baton is seamlessly passed from one body to the next.
Looking forward, after AAOIFI "acquires and integrates", there needs to be discussions for a merger of equals with Malaysia-based Islamic Financial Services Board, 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.
About the Author
Rushdi Siddiqui is global head of Islamic finance for Thomson Reuters based in New York. Rushdi.Siddiqui@thomsonreuters.com
© Business Islamica 2012
