Accord on Islamic banking signed in Malaysia

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By Khalil Hanware, Arab News Staff

Published — Monday 4 November 2002

Last Update 4 November 2002 3:00 am

KUALA LUMPUR, 4 November — Central banks from seven Muslim countries yesterday launched a regulatory body to oversee the booming Islamic investment market. The Islamic Financial Services Board (IFSB) was inaugurated here by founding members Malaysia, Saudi Arabia, Indonesia, Iran, Kuwait, Pakistan, Sudan and the Islamic Development Bank.

The establishment of the IFSB — an association of central banks, monetary authorities and other institutions responsible for supervising and regulating Islamic banking — was “in response to the growing significance of the Islamic financial services industry,” officials said.

It is the culmination of two years of work by the founding members, with support from the International Monetary Fund and the Accounting and Auditing Organization for Islamic Financial Institutions. The Islamic financial market worldwide is estimated to be worth $200 billion and is growing at 15 percent a year.

Economists say there has been a boom particularly in the aftermath of the Sept. 11 terror attacks in the United States as investors pulled funds out of the West.

Malaysian Prime Minister Mahathir Mohamad said at the IFSB launch yesterday that the option to use the Islamic financial system must be open and voluntary so as not to cause turmoil and economic regression. The system combines Islamic laws against interest payments with modern banking principles.

Mahathir, a vociferous critic of Western economic ways, said an international financial system that was fair and rewarded hard work was needed rather than speculative activities that took advantage of the weak and ill-informed. “Speculation is really not business. It is a kind of gambling. It becomes worse when, in an effort to ensure high returns, manipulative measures are utilized,” he said, pointing to recent corporate scandals in the United States.

Mahathir said the road ahead for Islamic banking and finance is long and will be full of challenges. In the current global financial environment characterized by volatile and unpredictable market dynamics, rapid advancements in technology and financial innovation, have all culminated in increasing more complex and heightened financial risks.

“The birth of the IFSB, the international standard-setting body for Islamic financial institutions, comes at a time when the global economic and financial outlook is clouded by escalating uncertainty. The anticipated recovery in world growth has not yet happened. Indeed the risks have intensified. In the advanced economies, corporate failures and financial reporting problems have adversely affected investor confidence, resulting in downward trends in the global equity markets,” he said.

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