The launching this month of a Shariah Standard on Gold, developed jointly by the World Gold Council (WGC) and the multilateral Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), ostensibly offers guidance on the use of modern syariah-compliant financial products backed by gold.
The rationale is that the Standard opens up a new investment asset class enabling Islamic banks and other financial institutions to grow their customer base and facilitating the creation of a broader range of savings, hedging and portfolio diversification products.
For a global Islamic finance industry, like its conventional counterpart, still coming to terms with the impact of the global economic downturn and sluggish recovery in the aftermath of the financial crisis in 2008, this Standard could be a godsend. Already it has generated a state of euphoria and is trumpeted as a potential game changer for the Islamic finance industry to take that great leap forward which would see its market share of the global financial system rise beyond the current two per cent at an estimated US$2.6 trillion (RM11.6 trillion) assets under management (AUM).
“The opportunity for the use of gold in Islamic finance is clear. This Standard will enable the foundation of what could be the most significant event for syariah finance in modern times,” stressed the WGC and AAOIFI. No sooner was the Standard launched, Malaysian fintech, HelloGold, launched a syariah-compliant online gold platform, which is “simple and affordable for everyone to buy, sell, save, send gold and to use it as collateral from as low as RM1”.
In covering the Islamic finance industry for the last four decades, I have witnessed the launch of a number of false dawns, which similarly promised financial utopia and a panacea for the economic woes of the world. A sense of deja vu inevitably arises. The industry is partly driven by emotion and syariah rationale and justification. Its record in general in translating initiatives into bankable propositions, executed and delivered — in other words market capture — is pretty ordinary.
This is due to the underdeveloped and risk-averse culture of shareholders, investors, depositors and customers, which in some respects takes an ultra-conservative approach to financial innovation, product capture and Islamic law relating to financial transactions.
Take for instance exchange traded funds (ETFs). When the syariah-compliant ETFs were launched a decade ago, there was the usual hype of the potential of such funds. To date, there are only about eight Islamic ETFs offered by institutions in Malaysia, Turkey, Singapore, the United Arab Emirates and the United Kingdom.
The largest one is MyETF launched in 2008 by i-Vcap, a subsidiary of Valuecap Sdn Bhd, which in turn is equally owned by Khazanah Nasional Bhd, PNB (Permodalan Nasional Bhd) and KWAP (Kumpulan Wang Persaraan), and which, at end November, has a net asset value of RM296 million — fairly modest compared with the conventional ETF market.
ETFs re open-ended UCITS III (collective investment scheme) funds that track an underlying equity index. In the case of MyETF, it is the Dow Jones Islamic Market Malaysia Titans 25.
In 2010, Kuveyt Turk Participation Bank (KTPB), the largest Turkish Islamic bank and a subsidiary of Kuwait Finance House, pioneered GoldPlus ETF, the first ETF based on gold where investors can invest in gold via the Istanbul Gold Exchange. But, ETFs have failed to take off in Islamic finance because the investor universe is not sophisticated enough and the promoters are not on top of their marketing game to articulate it to laymen.
Indeed, the complex treatment of gold in Islamic tradition, according to AAOIFI, has limited its development as an investable asset class, given that it is one of the six ribawi (interest-bearing) items alongside silver, wheat, dates, barley and salt. Ribawi items are defined as staple, everyday commodities so stringent transaction rules apply to prevent injustice or inequality between transacting parties.
This also stems from the longstanding debate about whether gold is a currency or a commodity, making the design of consistent syariah rules for modern gold products more difficult, which in reality has evolved into a scattered and fragmented set of rulings.
In fact, one of the very reasons why the AAOIFI Standard on Gold was introduced is to give uniformity and clarity on syariah guidance on gold as an investment asset class. This also in the context that today, gold trading is far more sophisticated and the demand for gold has also changed, including central bank reserves, greater usage in industry, and in gold-based investment products including futures, certificates and ETFs.
In Islam, gold has a deep significance arising from the specific principles governing the treatment of gold and silver as al-Thamaniyyah, real money or currency. The exchange of money and currency is subject to strict rules because of the proscription of riba — the exchange of two similar commodities must be on the basis that it is an on-the-spot transaction (hand to hand) and it must be of equal counter value.
The importance of gold as an asset class cannot be understated. The element is steeped in history and usually serves as the safe haven asset class in which investors seek refuge from the vagaries of political upheaval and economic woes.
Whether the AAOIFI Standard proves to be the gamechanger that promoters predict only time will tell. Turkey’s KTPB is one Islamic bank that has successfully leveraged gold as an asset class for its varied investors for over a decade. These include pioneering gold participation accounts, buying gold coins through an ATM certified by the London Bullion Market Association, the first syariah-compliant gold swap, and of course the GoldPlus ETF.
Mushtak Parker is an independent London-based economist and writer