A Case Study on Standardization Debate in Islamic Finance

This paper discusses the standardization debate in Islamic finance. ‘Islamic’ structured products particularly Wa’d-based total return swaps are used as a case study to discuss the importance of standardization. The growth of the Islamic finance industry has been hampered by the lack of consensus (ijma`) among the Sharī`ah scholars’ who belong to diverse sects or schools of thought (madahib). This diversity has resulted in disagreements about the acceptability of specific features of Islamic financial products. Standardization means establishing universal Shari’ah standards which would eliminate the shortage and the divergence of Shari’ah interpretation.

Introduction: The Islamic finance industry has been growing at about 15 percent a year; Shari’ah-compliant assets currently valued at $1 trillion are projected to rise to $1.6 trillion by 2012, according to the Kuala Lumpur-based Islamic Financial Services Board (IFSB). In 2008, at a Euromoney roundtable, Islamic finance industry experts suggested that “fullerdevelopment depends on clearer views on objectives, further development of regulation and standardization of products and approaches”. At the same event Khalid Hamad who is Executive Director of Banking Supervision at Central Bank of Bahrain, was quoted “Islamic finance is still a niche market. There are too many loopholes in terms of the practice, in terms of the laws and regulations”…
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