JEDDAH: From Australia to South Africa, governments are scrambling to change the law to accommodate the $1 trillion Islamic finance industry, whose avoidance of toxic debt has looked increasingly attractive since the global crisis. “Aside from Malaysia, Sudan and Iran, no government has really owned the Islamic finance project,” Humayon Dar, chief executive of London-based Shariahh advisory and structuring firm BMB Islamic, said. In Malaysia, there is a national Shariah Council that sets rules for Islamic financial institutions. Rules are standardized under the central bank, which has made an active push towards supporting Islamic finance. In the first three quarters of 2010, the Malaysian government accounted for 62.5 percent of all Islamic bonds, or Sukuk, issuances globally, valued at $18.4 billion, according to Thomson Reuters data. By comparison, not one sovereign Sukuk came out of the Gulf Arab region during the same period. In the United Arab Emirates, lawyers say some of the government's laws effectively work against Islamic financial transactions, especially those related to Ijara Sukuk, one of the most common forms of Islamic financing. Ijara Sukuk involves a transfer of tangible assets - most commonly real estate - from one party to the next as Islamic law does not allow for debt or interest payments. It can best be described as an operating lease in which the owner leases an asset to the client. “The issue lies with the high fees related to the transfer of land in an ijara and investors wonder if the cost is going to be significant enough to hurt their potential returns,” Nabil Issa, partner at international law firm King and Spalding, said. “The UK and France have encouraged Shariah-compliant transactions. The UAE must waive the fees to make Islamic finance easier.” The financial crisis, which caused a rash of corporate defaults, disputes and insolvencies in Dubai, exposed weaknesses in regulation and resulted in a loss of faith among businesses. That has prompted some companies to register in the Dubai International Financial Centre despite the higher costs because the financial free zone has been allowed to self-legislate. DIFC has created a legal framework that blends the best practices of leading jurisdictions, reassuring companies in case of default or business disputes. “There's no doubt in my mind that if the UAE made a push to change its current laws to be more transparent and accommodating, especially when it comes to land registration fees, we would see more Islamic finance growth and more Sukuk here,” said one attorney. “There's so much pride in the industry that the rest of the world is making changes, but not enough work at home to support the needs of Islamic finance.” Bahrain, to its credit, has positioned itself as a hub for Islamic finance in the region and the central bank provides a regulatory framework for Islamic financial institutions.
