Tanmia Capital's Nadim wants Shariah board audits and integrated accounting standards

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I was interviewed by IFIS - a UK based online news portal. The discussion addressed recent issues and trends in Islamic banking such as Sharia supervisory boards, accounting standards and SMEs financing.

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Tanmia Capital's Nadim wants Shariah board audits and integrated accounting standards

  1. 1. COPYING AND DISTRIBUTING ARE FORBIDDEN WITHOUT THE PERMISSION OF THE PUBLISHER. 05 Aug 2014 People & Markets Tanmia Capital's Nadim wants Shariah board audits and integrated accounting standards Bassel Nadim, managing director of Tanmia Capital, spoke to IFIS about the outlook for SME financing, how best to regulate Shariah supervisory boards and the importance of integrated accounting standards for Islamic banking. Should we be moving towards Islamic-specific accounting standards or International Financial Reporting Standards (IFRS) with Islamic add-ons? It will be better for the growth of the industry to follow IFRS with some additional modules to address Islamic banking. I’m aware that this is being debated in IFRS, and there is a committee looking at integrating Islamic banking in terms of reporting standards. But IFRS should also collaborate with Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and other Islamic regulatory bodies to develop the Islamic modules. This would enhance the industry for several reasons. Firstly, it will follow a more comprehensive reporting framework, so a well-documented and internationally recognised standard can be followed, bringing consensus. One of the challenges at the moment is that when an international financial institution is reporting using AAOIFI or IFRS, the level of net profit may differ because measurement methods differs from body to body. This causes confusion among stakeholders to understand which profit to follow. Secondly, it will reduce the cost of reporting. In some jurisdictions like the UK and Oman, the regulators require dual filing using AAOIFI and IFRS. Therefore you have to file twice, and this costs a lot of money. Do not underestimate the cost of reporting — it requires different audit assignments, accounting and IT systems and the cost of operation is expensive and this harms the efficiency of the Islamic banking industry and makes it less competitive. Thirdly, the accounting reporting standards are not a wholly Shariah-compliant feature. The argument around interest rates or the circulation of debt or unethical products is the core of Islamic banking. But reporting is not. If Islamic banks follow IFRS it will not jeopardise the unique features of Shariah. I think that it will reflect positively on the industry. Islamic banks still can follow the Shariah standards of AAOIFI or the Islamic Financial Services Board. The number of people who understand AAOIFI standards is significantly lower than IFRS. If we want to make Islamic banking as widely available as possible, we as practitioners have to make Islamic banking easier. Not in terms of the fundamentals and Shariah-compliant ethos but in terms of the accounting standards. This will remove certain barriers and make Islamic banking more competitive.
  2. 2. How can Islamic financial products help SMEs? Islamic banking and SMEs can benefit each other. SMEs need funds and knowledge, and Islamic banks can be a good for the SMEs because they can share risk and provide advice. Unfortunately, there is no significant difference between the penetration of Islamic banking into the SME sector compared to the penetration of conventional banking. In fact, some reports suggest that Islamic banking [among SMEs] is lower. There are several reasons for this. One of the challenges is that the risk sharing principle makes Islamic financial institutions prone to higher risk than their peers in the industry. We need a risk management model to address the unique features of Islamic banking. Dubai is discussing the possibility of a central Shariah board in the manner of Malaysia. Do you think this is the correct approach for countries to take? Central Shariah boards are a good idea in order to synchronise fatwas, as long as there is a clear mandate for their role and a mechanism that measures the individuals and the board’s performance. It is important to look at what the board is doing, how it is collaborating with other stakeholders and what their communication strategy is. There should be a mechanism to conduct an audit on the Shariah Supervisory Boards (SSB). This audit could be through structured documentation, self-clearance, peer review or regulating the number of SSBs a scholars can join. If the market requires it, confidence is questionable or if the regulators in a specific jurisdiction do not have the expertise to cover the needs of Islamic financial institutions, then I think it’s a good option to have a central Shariah board. But it depends on specific circumstances How is the perception of Islamic finance changing? How can it be made more acceptable to non- Muslim as well as Muslims? The concept is becoming clearer to market participants in the Middle East as well as in the new markets in Europe and overseas. Regulators are more aware of the Shariah consideration and efforts are being made to accommodate Islamic banking in national regulatory frameworks. Acceptance of Islamic banking products for non-Muslims differs according to the market segment. There are three main segments: governmental, corporate and retail. We have observed western countries issuing sukuk in their pursuit for alternative public financing. But when it comes to corporate and retail, the tendency towards Islamic banking is higher on the retail side. Corporates base their decision on simplicity, attraction, the relationship with the bank, the product design and the service — therefore competitive Islamic banking services are important to penetrate in the corporate segment. The retail side is driven more by religious beliefs. I would say around 25% to 30% of customers turn to Islamic banking because they motivated by their faith. Then there are around 15% of [potential] retail customers who would opt out because they don’t want Islamic banking. The rest would only turn to Islamic banking if they found it appealing and it satisfied their needs in areas such as product selection, income and lifestyle. For Islamic banks to take advantage of this segment, a lot of banking techniques are needed to make innovative products. Is it useful or desirable for Islamic products to replicate conventional counterparts? At the end of the day, successful Islamic products will have some similarities to their conventional counterparts. Islamic banks need to orient themselves to market needs, therefore they have to address the
  3. 3. same customer needs that were already being addressed by conventional banks, such as product selection and pricing. In order to remain competitive Islamic banks have to offer products based on their clients’ needs such as current accounts, savings accounts, home financing, car financing and so on. It is healthy to look at the experiences of conventional banking. But I don’t think it’s a good idea to become an Islamic copy, because the fundamentals and ultimate objectives are different as is the way of structuring, the issue of asset based financing, and the issue of certainty. Tell us about your business Tanima Capital. The company is newly established and we expect to be fully operational by 2016. We will focus on strategy development and advisory. The company looks at strategy issues of the financial institutions, financial inclusion and exchanges the experiences of London and Dubai. It is not Shariah-advisory consulting, but rather a company of Islamic banking and ethical finance practitioners that will work with clients and partners to develop solutions, products and build capacities. One of our clients is the Association of Accounting Technicians in the UK, we are also working with some of the large accounting firms and have recently conducted a senior workshop in Istanbul on creating a multinational development bank in Turkey. We hope to be involved in some exciting projects in the future. For example we are in the very early stages of discussing to develop an Islamic mortgages scheme with a UK based authority. COPYING AND DISTRIBUTING ARE FORBIDDEN WITHOUT THE PERMISSION OF THE PUBLISHER. UK mulls retail sale for sovereign sukuk debut (url:../../3343232/UK-mulls-retail-sale-for-sovereign-sukuk- debut.html) 17 May 2014 QIB lifts net profit by 15% in first half (url:../../3361260/QIB-lifts-net-profit-by-15-in-first-half.html) 14 Jul 2014 Nasdaq Dubai signs up first bank to murabaha platform (url:../../3340968/Nasdaq-Dubai-signs-up-first- bank-to-murabaha-platform.html) 12 May 2014 IFIS data analysis: GCC sukuk grows on Saudi push as Asia ... (url:../../3332721/IFIS-data-analysis-GCC- sukuk-grows-on-Saudi-push-as-Asia.html) 21 Apr 2014 Kuveyt Türk launches $250m Islamic-compliant loan (url:../../3270241/Kuveyt-Trk-launches-250m-Islamic- compliant-loan.html) 23 Oct 2013 RELATED ARTICLES

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