New Shariah Rule Goes For Gold

Once off-limits in shariah-compliant finance, gold is a new option for Islamic investors.

The Accounting and Auditing Organization for Islamic Financial Institutions (Aaoifi) has issued a new shariah standard on the use of gold. It allows financial institutions to apply shariah principles in the direct physical handling of gold and in using the metal as an underlying asset in financial transactions. The new standard is expected to open new business opportunities for Islamic financial institutions (IFIs), as well as to stimulate additional demand for gold.

With gold now to be used to back shariah-compliant financial products, IFIs will have enhanced flexibility in structuring their offerings, providing an opportunity to widen their product range. This, in turn, could enhance their ability to attract new clients, helping to bridge the option gap between IFIs and conventional institutions.

Specific gold-based products, whether for investment or financing, will be introduced by IFIs. Part of the problem previously with gold in Islamic finance was the specific religious interpretation of the asset. Gold joins equities, real estate, Islamic bonds and takaful (insurance) as vehicles approved by the Aaoifi, the Islamic international corporate body that establishes accounting, governance and shariah standards for Islamic financial institutions. The group developed the new standard in collaboration with the World Gold Council.

Under the new rules, gold should become more widely accepted by Islamic investors and borrowers. IFIs’ trading activities should also increase, as gold has long been an important commodity in many Islamic countries.

The new standard could also support the price of gold. Investment in gold will undoubtedly grow in 2017; IFIs in key regions plan to introduce gold investment products in the coming months.