A Different Kind of Consolidation in Islamic Finance

A Different Kind of Consolidation in Islamic Finance
By Rushdi Siddiqui
July 2011

One of the most over-used words in Islamic finance is not standardization, scholars, regulations, etc., but 'consolidation'. Islamic banks, Islamic leasing companies, Takaful companies need to consolidate to reach size and achieve scale.




As larger capitalized entities, they can better compete with not just the Islamic windows and subsidiaries of conventional banks and insurance companies (like HSBC or Prudential) but eventually the larger conventional financial institutions for mandates on project finance, M&A, buyouts, and so on.

Then again, what about consolidation amongst the Islamic industry bodies, the likes of AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions), IIRA (International Islamic Rating Agency), IIFM (International Islamic Financial Market), and CIBAFI (General Council for Islamic Banks & Financial Institutions)?

Consolidation would make sense when there is an overlap of founding shareholders, overlap of conference content, when same scholars sit on boards of the various bodies, when there are resource-constraints resulting in operational challenges and hiring qualified human assets, and so on.

Finally, consolidation would make sense when the need of the hour is an industry body that not only sees the bigger picture and where they fit in as an important stakeholder in Islamic finance versus the present ‘silo’ approach, but also speaks with one ‘heavy’ voice.

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 (IsDB), Al Rajhi, Albaraka, and Kuwait Finance House (KFH). The vision for Islamic finance at the time period of conception and launch of these industry bodies was from 1991 (AAOIFI) to 2005 (IIRA), and now times have moved on and the bodies need to do likewise in order to stay relevant.

The IIRA’s website states its corporate profile as:

The Islamic International Rating Agency (IIRA) is 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 the history, size and reach to be able to compete with established rating agencies involved in Islamic finance, like Standard & Poor’s, Moody’s or Fitch.  More importantly, is there any point in reinventing the rating ‘wheel,’ as the rating agencies 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 Shariah adherence of Islamic banks, Takaful, leasing, iREITs, and even Islamic stock exchanges (like the DFM). The focus on process may result in addressing one of the important issues in Islamic finance, the non-compliant Shariah risk.

The International Islamic Financial Market (IIFM) website states its mission as:

IIFM is 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 whilst working and/or partnering with established conventional institutions like ISDA. The question becomes would it be more sensible and efficient for IIFM to work under the umbrella of an industry setting-body that produces standards requiring standardization/adoption?

The message from the Chairman of General Council of Islamic Banks & Financial Institutions (CIBAFI) on its website states:

CIBAFI was established, then, for 2 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, from Euromoney in London to IIFF in Dubai to KLIFF in Malaysia, that have pre and post conference workshops.

Would it not make more sense to bring CIBAFI under the umbrella of an industry body that produces standards that are followed by training, seminars, and work-shops on them?

Finally, the most prominent Islamic finance industry body in the GCC is AAOIFI, with 84 standards [(a) 44 Shari'ah standards, (b) 26 accounting, (c) 5 auditing, (d) 7 governance, including on Shari'ah compliance and supervision processes, and (e) 2 codes of ethics] and nearly 200 members from 40 countries. The mission of AAOIFI, as stated on its website:

AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the industry. Professional qualification programs (notably CIPA, the Shari’a 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.

Here the question becomes, why only a handful of jurisdiction have mandatorily adopted the AAOIFI standards, including Bahrain, DIFC, Jordan, Lebanon, Qatar, Sudan and Syria? Has AAOIFI lost focus from its core mandate on accounting, auditing, ethics, governance and Shariah standards for Islamic finance to areas, like, stock screening for Shariah compliant companies?

AAOIFI is best positioned to be the umbrella Islamic finance industry body in GCC as its standards become globally adopted documents (IIFM) with a process review (IIRA), and promoted and protected with that understanding (CIBAFI).

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. For example, it results in one Islamic finance conference event with all the four bodies under roof and taking place in the various Islamic finance hubs to educate, make aware, and demystify.

In looking forward, stage 2, assuming AAOIFI is tasked with ‘acquiring and integrating’ these Bahrain-based industry bodies, there needs to be discussions for a merger of equals with Malaysia-based IFSB (Islamic Financial Services Board).

The IFSB website states:

The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors.

IFSB’s ‘prudential standards and guiding principles’ are targeted to the same stakeholders that AAOIFI ‘prepares accounting, auditing, governance, ethics and Shari'ah standards…’ for.

In stage 1, the Chairmen of these industry bodies need to put aside their egos for a bigger cause: promote and protect Islamic finance under one strong industry body.

A Different Kind of Consolidation in Islamic Finance