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Shariah Gold Standard – A much needed shot in the arm

May 2017

7th May | Dubai

Recently the World Gold Council (WGC) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) declared the launch of the Shariah Standard on Gold, offering guidance on the use of modern Shariah compliant financial products backed by gold. The rationale is that the Standard opens up a new investment asset class, which has been shrouded in debate till now, enabling Islamic financial institutions to offer their customer base a new range of products and facilitate the creation of a broader range of savings, hedging and portfolio diversification products.

Islamic Finance. The financial services industry that operates under Shariah Law, is rapidly growing in size and importance. The industry currently is estimated at USD 2 trillion; this is expected to grow in size and S&P’s opines that it could reach USD 5 trillion by 2020. The focusof the industry has been centric to Sharia-compliant assets such as equities, real estate an Islamic bonds also known as Sukuks. However investments in Gold have been elusive inspite of the yellow metal historically having been the choice of individual Muslims desirous of preserving wealth and value. This as it is a Ribawi item.

Shariah. A Ribawi item in Sharia law is an item that must be sold on weight and measure. There are six Ribawi items: Gold, Silver, Dates, Wheat, Salt and Barley. Given this, investors need to practice caution when investing in Gold to ensure that it meets certain conditions. As a Ribawi item, Gold cannot be traded for future value or for speculation.

In most cases trading gold futures contracts is haram and forbidden as proscribed by Islamic law. It is speculation and not backed by physical gold, the price can be volatile and you can end up paying or receiving interest on your trading account. This has been a reason for gold being limited as a currency and/ or jewellery.

Change. World Gold Council data shows that in the last eight years, major Islamic asset classes have all underperformed compared to gold.

The complexity of Islamic attitudes toward gold products has led to a scattered and fragmented set of rulings. This lack of uniformity is a major impediment on methods to invest in gold product offerings for the faith obliged investor. Creating a unified and authoritative guidance for gold is imperative therefore, if the asset class is to become a more widely accepted by Islamic investors.

The Shariah Standard on Gold is aimed at the same. This Standard will allow IFI’s (Islamic Finance Institutions) satisfy investor demand through the development of new Shariah-compliant gold products. It will also enable IFIs to develop alternative Shariah-compliant liquidity management tools. The Standard covers the use of gold in various contractual settings including partnerships, sales, donations, and contracts of security (surety). These applications of the Standard can be used to develop Shariah-compliant products such as

  • vaulted gold,
  • regular gold savings plans,
  • gold certificates and
  • physical gold ETFs, amongst others.

Gold bulls worldwide are reading into this as the shot in the arm the yellow metal has needed. The investment demand for gold among Muslims could surge by several hundred tons translating to tens of billions of dollars with the practical implementation of the Gold standard. Shariah-compliant assets under management as estimated by the Islamic Finance Stability Board (IFSB) are set to grow to USD 6.5 trillion by 2020. Even a 1% allocation to Gold within each investors portfolio would translate into USD 65 billion. The coming few months would most definitely determine if we are on the path to see Gold regain some of its lost sheen.

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