Shariah Gold Standard Approved for $2 Trillion Islamic Finance Market

by Jan Skoyles, Editor Mark O’Byrne

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the World Gold Council have made an important decision which was announced yesterday at the World Islamic Banking Conference in Bahrain.

This decision is about one of the most important markets in the world: the gold market, an invest-able market worth an estimated $2.4 trillion and is also of significance for the world of Islamic finance.

sharia-gold-infographic2-1

The AAOIFI, in collaboration with the World Gold Council (WGC) and Amanie Advisors, has approved what will become known as the Shariah Gold Standard. This is a set of guidelines that will expand the variety and use of gold-based products in Islamic Finance.

As many as 1.6 billion Muslims in the world, 25 per cent of the population, will have far greater access to the gold market than they have since the birth of modern finance, which has been primarily structured towards Western ideals.

More details were announced at the World Islamic Banking Conference including details of the gold products that are likely to be permissible.

The sharia gold standard announced yesterday allows the over 110 million investors in the Islamic world to invest in

a) vaulted gold

b) gold savings plans (such as GoldCore’s GoldSaver)

c) gold certificates

d) physical gold ETFs including “probably” the SPDR Gold Trust, the biggest exchange-traded gold (GLD)

e) gold mining shares (within certain Shari’ah parameters)

We know three things that the new Shariah gold-standard will achieve:

a) Increase diversity in the number of available Shariah gold compliant investment products

b) Greater emphasis on the role of physical gold in gold transactions

c) Islamic finance will have greater say in the setting of the gold price

To some, this may appear to be an unnecessary formality taken by the body whose guidelines are followed by Islamic finance institutions across the world. After all, physical gold is Shariah-compliant and holds a unique status for Muslims.

AAIOFI states, “From the perspective of Islamic Fiqh and the Islamic economic system, gold has its specific significance. This significance arises from the specific principles provided for gold and silver as Thaman in Shari’ah.”

According to Islamic texts, gold is a ribawi item, which means that it must be sold on weight and measure, and cannot be traded for future value or for speculation. In order for a gold instrument to be Shariah-compliant, the precious metal must be the underlying asset in related transactions.

However there has been a need for clarification for how gold bullion can be used for investment purposes by Muslims, for a long time.

This uncertainty has kept Shariah-compliant offerings at a minimum and many investors restricted by the type of gold bullion transactions they are able to partake in, with most focused on jewellery and coin offerings. Daud Bakar, chairman of Amanie Advisors, agrees, “.the existing Islamic standards for gold are fragmented, hampering product development and market demand.”

Currently in the gold market, the majority of activity regarding gold financial instruments is based almost entirely on speculation. This is due to the overwhelming size of both the London and COMEX (Chicago Mercantile Exchange) gold markets, which together have the greatest influence on the spot price of gold.

Whilst Islamic investors have always had access to the gold market through jewellery and coins, this guidance will vastly increase the number and diversity of investment products available. There are very few Shari’ah-compliant gold offerings today. Using its deep sector knowledge, GoldCore, and it