Bahrain's central bank is drafting legal documentation to set up a Sharia board of scholars that would oversee the kingdom's Islamic finance sector, in a step that could help the market compete with regional rivals.
The central bank already has a Sharia board, but its scope is limited to vetting its own products. A country-level approach – which is so far rare in the Arabian Gulf – could help to limit differences between products, speed the design of new products and boost investor confidence.
A “legal instrument” is now being prepared that would set out details of the Sharia board, said Khalid Hamad, the central bank’s executive director of banking supervision. He did not specify a time frame.
Oman’s central bank set up a Sharia supervisory board last October, but unlike Oman, Bahrain has positioned itself as a regional financial centre, with historical links to Saudi and Kuwaiti financial institutions, a status that in recent years has had to compete with Dubai and Doha.
“This will give us an edge to other markets, allowing more products to be attractive,” Najla Al Shirawi, the chief executive of the investment bank Sico Bahrain, said of Bahrain’s plan for a central Sharia board.
Islamic banks in the Gulf have traditionally practised self-regulation on the issue of religious permissibility, using their own individual Sharia boards to ensure the Sharia-compliance of their products. This approach proved popular for Islamic banks developing their own bespoke products, but as the industry matures, attention is shifting to volume transactions, which are cost and time-effective.
“More innovation is needed in this space, in particular tools such as Sharia-compliant repurchase agreements and profit-rate swaps. These are doable but need to be more widely accepted across the region,” said Ms Al Shirawi.
As it stands now, if tools such as Islamic repurchase agreements are to be used, clients face a cumbersome process of clearing transactions with every financial institution involved, she added.
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