The UAE needs to introduce more regulation to increase the stability of its Islamic finance industry, according to the IMF’s annual report on the country.
It must “tailor [its] regulatory and supervisory frameworks to adequately address Islamic banks’ specific risks”, said the IMF.
That means introducing new rules to govern profit-sharing investment accounts and Sharia governance.
The UAE must also continue to develop new Sharia-compliant liquidity management tools for banks, said the IMF.
Islamic assets presently account for 17 per cent of assets and 19 per cent of bank deposits in the UAE, according to the IMF.
The UAE’s Central Bank needs to act as a lender of last resort to the country’s Sharia-compliant lenders, said Jaseem Ahmed, the secretary general of the Islamic Financial Services Board, an independent international institution.
The Islamic finance sector was “systemically important” in the UAE, Qatar, Saudi Arabia, Kuwait and Yemen because Sharia-compliant assets account for more than 15 per cent of total banking system assets in these countries. he said.
The UAE government plans to introduce a unified Sharia authority to act as the country’s ultimate arbiter of jurisprudence on Islamic finance.
The authority will be set up by the end of September, according to Khalid Al Janahi, an adviser to the government-backed Dubai Islamic Economy Development Centre. The centre oversees the emirate’s efforts to transform itself into a centre for Sharia-compliant finance, goods and services.
The next step is for the UAE government to address legal enforcement of contracts governing Sharia-compliant financial products, according to Sayd Farooq, who also advises the Dubai Islamic Economy Development Centre, and a former head of Islamic capital markets at Thomson Reuters.
“Who is the ultimate arbiter of the Islamic interpretation of contracts? When parties go to court, who arbitrates whether a contract is Sharia-compliant or not?” said Mr Farooq.
“Islamic jurisprudence is an art, and the interpretations are not always uniform,” he said.
When the property developer Nakheel, owned by Dubai World, almost defaulted on its US$4 billion sukuk in 2009, the legal difficulties the crisis created were major, said Omar Salah, a senior associate at the Amsterdam law firm De Brauw Blackstone Westbroek, in a paper published when he was a doctoral candidate at Tilburg Law School in the Netherlands.
Nakheel had sold assets to a special purpose vehicle, but under Dubai law, creditors had no rights to the assets held by it. The crisis was ultimately resolved, but the lesson stood that the UAE’s legal system did not address key areas of contract law regarding Islamic finance, according to Mr Salah’s paper.
Clarity in dispute resolution over Sharia-compliant assets “is an area where all countries are suffering”, Mr Farooq said.
Follow The National’s Business section on Twitter