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Islamic finance group approves standard for gold products
Traditionally, gold has been viewed as a currency in Islamic finance, confining it to spot trades in fixed weights and measures. Investors have been unable to speculate on its future value and there has been no clear policy on how to trade gold.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) approved the final version of its new standard on gold and trading controls last week and an official launch will be announced soon, it said in a statement.
The new standard addresses issues such as collateral, set-off, screening and the exchange of gold in spot and deferred transactions. Sharia compliant products backed by gold could include exchange-traded funds and savings accounts.
AAOIFI issues guidelines that are followed wholly or in part by Islamic financial institutions across the world, so its efforts would help align the industry to global practices.
Uncertainty about how gold can be used in Islamic finance has kept sharia-compliant bullion transactions at a minimum, Matthew Keen, founder of Dubai-based precious metals consultancy Evidens and an adviser to the World Gold Council, said.
London-based ETF Securities, for example, launched a sharia-compliant exchange-traded commodity product for gold, silver, platinum and palladium in 2008 but it never gained traction.
"There is such a lack of understanding of what sharia law would mean in terms of gold investing and this standard would at least provide a common ground," ETF Securities director of commodity research Nitesh Shah said.
"However, this is not going to be a game changer for global gold consumption," he said, as sharia law does not prohibit the ownership of gold jewellery or coins.
The final standard will be made available on a complimentary basis by AAOIFI and the World Gold Council (WGC), an industry organisation that supported the development of the standard.
Proponents hope the new guidance will help address muted consumer appetite for gold in the Middle East, where demand has actually fallen in recent years.
With Islamic financial assets seen at about $2 trillion, a one percent allocation to gold would boost demand by $20 billion, or about 500 tonnes.
"I am a bit sceptical as even in the developed world, where access to gold investing has been there for many decades, you don't see a one or two percent of anyone's aggregate portfolio allocated to gold, so it is highly unlikely in a new emerging market," Shah at ETF Securities said.
AAOIFI also approved a standard on the liability of investment managers, which addresses issues including negligence and breach of contract. It details liability on the part of service agents in transactions including Islamic bonds (sukuk) and in syndicated financing contracts and other products.
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