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. But in the Gulf Arab region, birthplace of Islam and cradle of Islamic finance, governments have taken a more passive approach, which experts say is slowing the industry's growth.
"Aside from Malaysia, Sudan and Iran, no government has really owned the Islamic finance project," Humayon Dar, chief executive of London-based sharia advisory and structuring firm BMB Islamic, said. In Malaysia, there is a national sharia council that sets rules for Islamic financial institutions. Rules are standardised 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.
Saudi Arabia's laws, by definition, require organisations to adhere to sharia, a set of Islamic legal principles that include a ban on interest. Its central bank does not even differentiate between conventional and Islamic banking. Yet the growth of Islamic banking in the kingdom, the Gulf Arab region's biggest market, is hindered by the lack of clear laws, a 2009 report by Blominvest Bank, the investment banking arm of Lebanon's Blom Bank Group, said.
Many Islamic lenders, for instance, are wary of providing mortgages given the lack of clarity in Saudi Arabia over their ability to foreclose on properties in default.
Lawyers and bankers say these concerns are putting pressure on Saudi housing demand and prices. A Saudi mortgage law has been in the works for over a decade but it's still unclear when it will come to pass.
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Even 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 sharia-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, who asked to remain anonymous.
"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, based on the guidelines issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
Bahrain-based AAOIFI is the closest thing Islamic finance has to an international independent regulator to set standards.
The central bank also has rules covering capitalisation, risk management, financial crime and disclosure and is pushing to train Islamic scholars to help the industry grow faster. But Islamic finance faces hurdles in other markets in the Middle East and North Africa, where barriers to entry remain.
In Oman, home to about 3.4 million Muslims, the central bank's policies discourage the establishment and expansion of Islamic financial institutions.
Egypt is another case in point. It is the sixth-biggest Muslim nation with 80 million people, but only 3 to 4 percent of its $193 billion banking industry is Islamic. While Egypt's financial regulator sees the implementation of sukuk rules by the first quarter of 2011, some analysts say it is too early to call how it will help Islamic finance grow.
Part of the blame lies with 1980s ponzi schemes that claimed to be Islamic and left millions of Egyptians wary of Islamic banking. After the exposure of the schemes, Egypt's foremost Muslim cleric, Sheikh Mohammed Sayed Tantawi, issued a controversial ruling allowing for interest, as long as it was not excessive, which essentially sidelined the need for Islamic finance.
Analysts say fears that the Muslim Brotherhood, which believes in creating an Islamic state, could use Islamic finance for political gain have discouraged the government from adopting laws to foster the sector. By contrast, Australia's national taxation board is planning to meet in November to revamp its laws to get rid of double stamp duties. In South Africa, the government is looking to amend its tax laws to help grow the industry, even though Muslims only make up 2 percent of the population.
"The Muslim community in South Africa was at a disadvantage," Amman Muhammad, managing director at Absa Islamic banking, said. "We have gotten regulators to understand our plight."
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