Islamic finance sector watchdog in the offing

The Central Bank of Bahrain (CBB) 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 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 Gulf - could help to limit differences between products, speed the design of new products and boost investor confidence, according to the Bahrain-based Gulf Daily News (GDN).
A "legal instrument" is now being prepared that would set out details of the Sharia board, Khalid Hamad, the central bank's executive director of banking supervision, said.
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 seen growing competition from Dubai and Doha.
"This will give us an edge to other markets, allowing more products to be attractive," SICO Bahrain chief executive Najla Al Shirawi.
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 facilitating 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 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.
The CBB also plans to introduce rules to expand its internal Sharia review and audit functions, while making it mandatory for banks to undergo an independent external Sharia audit.
The UAE is the only other regulator in the Gulf to have announced a plan to adopt a centralised Sharia approach. This would be backed by specific legislation, but a firm timetable has not been given for the plan, GDN reported.