Global commodities trading acquired a whole new investment class on 5 December, with the launch of the first-ever set of official regulations for the trade of gold in Islamic finance.
Drawn up by specialist watchdogs the World Gold Council (WGC) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the new rules – collectively known as ‘the Standard’ – have been designed to boost opportunities for investment within the Sharia system.
As the bodies note in a supporting research paper: “Investment options in Islamic finance remain limited compared to the choices available in conventional finance. The outstanding volume of sukuk issuance stood at $290.6bn in 2015 – down from $294.7bn the previous year.”
They added: “Although new and non-traditional sovereign issuers, such as the UK, Hong Kong and the International Finance Corporation, have made forays into the sukuk market in recent years, the termination of the Malaysian central bank’s short-term sukuk issuance programme poses a serious challenge to liquidity management in Islamic finance.
“In our view, the constrained universe of investible Shariah-compliant assets – particularly highly liquid and low-credit risk assets – represents one of the most significant barriers to the growth of the industry.”
In the same report, AAOIFI secretary general Dr Hamed Hassan Merah points out: “The original sources of Shariah – the Holy Quran and Sunnah – contain numerous cautions on the use and hoarding of gold from a moral and ethical perspective.
“These include several prohibitive uses, as well as general guiding principles against the hoarding of gold and silver.”
However, Dr Merah adds: “Today, gold trading is different and demand for gold has also changed. Newer demands include central bank needs and industrial needs, like electronics. Newer avenues include exchange-traded futures and other, similar transactions.”
He further explained: “Gold can certainly be a good alternative investment opportunity, which is highly liquid. At AAOIFI, however, we would say that one of the reasons for making this Standard a priority was to ensure that appropriate products are available to provide investment solutions to customers, and manage liquidity for Islamic financial institutions (IFIs) within Shariah-compliant options.”
On that basis, the Standard declares, investment in gold is permissible in Islamic finance – provided that all, relevant Shariah rulings are satisfied, such as those related to taking possession of gold, and the proper calculation of Zakah: a Quran-mandated alms.
In Dr Merah’s view, the Standard could set the stage for an exciting new future for Islamic finance, “constructing and structuring new investment products in conformity with Shariah rules and precepts”, plus those relating to liquidity management for IFIs.
“Hopefully,” he added, “this would represent a progressive stride for the Islamic finance industry.”