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| Source: AAOIFI website. Emblem for the shari'ah standard for trading in gold. |
The AAOIFI standard from the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was launched at the end of 2016 to clarify how gold investments can be compliant with shari'ah law.
Under the rules of ribawi (ربوي)*, six items frequently change hands, and more stringent rules are needed to protect consumers from usury - which is prohibited in Islam - and theft, explained Shaokai Fan, Director, Central Banks and Public Policy, World Gold Council, speaking at a panel about the topic at the inaugural Asia Pacific Precious Metals Conference in Singapore. The event is organised by the Singapore Bullion Market Association (SBMA).
"There was a reluctance to embrace gold as a modern asset class (because of the) limited shari'ah guidance around gold," he said. "The existing guidance was fragmented and limited."
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| Lin discusses the potential for gold as an investment in Islamic finance. |
As one of the premier and most respected standards bodies in Islamic finance, whose standards are widely used throughout the Islamic universe, AAOIFI standard has been welcomed by both Muslims and non-Muslims alike, Lin observed.
"Having this standard out there says without a doubt that gold is shari'ah-compliant," Fan said. "The standard is definitive and comprehensive."
Gold has low correlations with existing Islamic asset classes and is no more volatile than the existing assets. It is traded at much higher volumes than sukuk, and has powerful diversification capabilities, extending the "size of the playground" significantly, Fan said. "With gold (you) can move into a large asset class during times of financial distress," he noted.
He added that the World Gold Council is developing solutions that fit the needs of all Islamic classes. "We are working with Islamic financial instutions on creating new gold-based products, engaging with Islamic institutional investors and other buy-side institutions on the case for gold in Islamic finance," he shared.
Southeast Asia has a big part to play when it comes to trading gold the shari'ah way. In the March 2017 edition of Crucible, an SBMA publication, Lin calls Southeast Asia the "natural home for new shari’ah-compliant gold products". "Malaysia has long been a vanguard in Islamic finance with a robust array of shari’ah-compliant solutions catering to a wide variety of investors. Indonesia is the world’s most populous Muslim country and the government has prioritised the development of Islamic finance as a financial development policy. Gold has performed better in ringgit and rupiah terms over the past decade than in US dollar terms, reflecting its usefulness as a wealth preservation instrument for investors in the region.
"The World Gold Council is actively working with several Southeast Asian financial services providers to provide new gold financial products for retail consumers that will comply with the standard," he stated in the publication.
Two shari'ah-compliant gold investments are the SGX Kilobar Gold Contract and the HelloGold mobile gold investment platform.
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| Chin discusses the Singapore Kilobar Gold Contract. |
Announced mid-December 2016, the Singapore Kilobar Gold Contract is the world’s first shari'ah-compliant gold futures. The contract was certified by Amanie Advisors, an advisory firm specialising in Islamic finance solutions, to be in compliance with the Shariah Standard on Gold as set out by AAOIFI.
William Chin, Head of Metals & Bulk Commodities, SGX, said the gold contract is a credible, transparent benchmark for the market and complements the over-the-counter market. "Shari'ah compliance will require product innovations (and) multiple efforts across multiple regions," he said.
HelloGold is a fintech company that offers the HelloGold gold trading platform via a mobile app. HelloGold has also been certified shari'ah-compliant by Amanie Advisors. Robin Lee, MD, HelloGold, noted that the opportunity for shari'ah-compliant gold investment products is huge when 815 million people have no choice but to maintain their wealth as cash or in savings
accounts.
According to Lee, an estimated 300 million Muslims in the ASEAN region and China have no access to suitable Islamic financial products because minimum eligibility requirements are out of their reach. HelloGold, on the other hand, enables customers to buy 99.99% investment-grade gold from as little as RM1. The company charges a 2% per annum management fee.
Interest in HelloGold has been high, Lee said. A modest marketing campaign resulted in 1,000 customer signups, he said.
"The reaction has been overwhelmingly positive both from investors and financial institutions," summarised Lin. "When we were in Bahrain in December 2016 (introducing the standard) the crown prince (told us) 'Why did you take you so long to come up with this?'."
According to Lee, an estimated 300 million Muslims in the ASEAN region and China have no access to suitable Islamic financial products because minimum eligibility requirements are out of their reach. HelloGold, on the other hand, enables customers to buy 99.99% investment-grade gold from as little as RM1. The company charges a 2% per annum management fee.
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| Lee discusses the size of the Muslim target market for shari'ah gold investments. |
Interest in HelloGold has been high, Lee said. A modest marketing campaign resulted in 1,000 customer signups, he said.
"The reaction has been overwhelmingly positive both from investors and financial institutions," summarised Lin. "When we were in Bahrain in December 2016 (introducing the standard) the crown prince (told us) 'Why did you take you so long to come up with this?'."
*A definition of ribawi. There are only six items considered under ribawi, gold, silver, wheat, salt, barley, and dates.