A top guideline-setting body for Islamic finance is developing a standard for gold-based products in the industry, a move that could allow the use of bullion in a wide range of sharia-compliant applications.
Until now gold has been treated mostly as a currency in Islamic finance, limiting its use to spot transactions. There has been little guidance from standard-setters on products which classify gold as a commodity underlying more complex contracts.
The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) said last week that it had taken up the development of a standard for gold, a project which was launched last year by the World Gold Council (WGC), a London-based market development body.
“This standard is expected to have a substantial, positive impact … and will cover a wide spectrum of contemporary applications,” AAOIFI secretary-general Hamed Hassan Merah said.
AAOIFI issues guidelines that are followed wholly or in part by Islamic financial institutions around the world, which hold around $2 trillion in assets.
The WGC published an exposure draft in November which analysts believe could accelerate the timetable for the creation of a final standard. Such drafts have traditionally taken AAOIFI scholars two years to develop internally.
The WGC’s draft outlines several uses for gold such as investment accounts, derivative contracts, security collateral, exchange-traded funds and Islamic bonds, said Natalie Dempster, WGC managing director of central banks and public policy.
Potential issuers of Islamic instruments have expressed interest in products such as gold accumulation accounts and its applications could extend to liquidity management tools for Islamic banks, she said.
Islamic banks are expected to increase the amount of high-quality liquid assets (HQLAs) which they hold to meet stricter Basel III banking standards being phased in globally.
“Gold for its nature could fit into HQLA buffers that Islamic banks could hold,” Dempster said.
The exchange of gold must be on a spot basis if treated as a currency, but gold as a commodity could be the subject of a future sale under the principle of salam, or deferred delivery sale, the WGC’s draft says.
This would require a unilateral undertaking from the buyer of gold to execute a spot purchase at a later date, while the seller would have full discretion to opt out of that transaction.
The WGC has held seminars in Dubai and Kuala Lumpur to discuss its draft and plans to stage additional technical workshops in the second quarter, Dempster said.