Islamic finance standards to offer new gold, silver products

DUBAI: New standards for the use of precious metals in Islamic finance are encouraging the development of financial products based on gold and silver, from futures contracts to a mobile app.

The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which sets guidelines followed in whole or in part by Islamic financial firms around the world, approved new standards last month for precious metals.

The standards will reduce uncertainty over what is religiously permissible, which has hampered development of products using precious metals. The greater clarity provided by the standards could spur an increase in the use of gold and silver in Islamic finance over the next few years.

It is too soon to gauge the extent of that increase, but some companies have begun testing the Islamic market´s potential. Toronto-based Bullion Management Group (BMG), which manages $348 million in assets, launched a silver fund in October and expects its bullion funds will adhere to the new AAOIFI guidance, Nick Barisheff, BMG´s founder and chief executive, said.

Take-up of the fund by wealthy individuals has been limited so far, but demand for securitised products such as exchange-traded funds could come from institutions that cannot buy bullion directly because of their internal investment policies, Barisheff said.

"Securitised versions could expand the market by allowing investors such as corporates." The new standards stipulate that transactions must be fully backed by physical metal and settled on the same day.

On Monday, the Singapore Exchange (SGX) said it had certified as sharia-compliant its gold futures contracts, which were originally launched in 2014 and are aimed at the wholesale market. The physically delivered contracts will provide a new risk management tool in Islamic finance, SGX said in a statement.

Its thinly traded Singapore kilobar gold contract saw only two lots traded in October, according to SGX data; targeting Islamic investors could help to revive interest in the contract. Meanwhile, Malaysia-based HelloGold has launched a sharia-compliant online platform using a mobile app, targeting customers through agreements with technology and financial services firms, chief executive Robin Lee said.

The firm has partnered with Asian retailer Aeon Credit Service to offer the product to Aeon´s 20,000 employees in Malaysia, and plans to extend this to Aeon´s 4.5 million customers in the country by February. "We expect to sell about 10,000 ounces of sharia-compliant gold by the end of next year," Lee said.

He also said that the firm planned to enter Indonesia, the Philippines and Thailand next year and China by 2019.At least one institution which originally tried unsuccessfully to promote the use of gold in Islamic finance is trying again.

In 2009, the Dubai Multi Commodities Centre (DMCC) and the World Gold Council launched an Islamic gold exchange-traded product that was eventually delisted because of low trading volumes.

This month, the DMCC said it had partnered with Turkey´s Borsa Istanbul to develop a sharia-compliant precious metals platform. It gave no time frame for the platform to be up and running.