MANAMA, 10 December 2007 — The availability of high liquidity coupled with the explosion of real estate projects in the MENA region have resulted in complacency in some Islamic banks, a central bank official said yesterday.
Rasheed M. Al-Maraj, governor, Central Bank of Bahrain, in his opening remarks at the 14th World Islamic banking Conference 2007, highlighted the challenges being faced by the Islamic banking industry and said though the Islamic banks have flourished in number, there is increasing evidence that banks will find it difficult to maintain the pace of innovation that marked the 1990’s.
Titled “Financial and Regulatory Architecture: Enabling Industry Growth & Containing Risks”, the WIBC 2007 has attracted over 1000 delegates from across the world.
“Over the last 20 years we have seen the establishment of several Islamic banks and financing companies as well as Islamic banking windows as banks have rushed to satisfy the appetite of investors and consumers for Shariah-compliant products to finance assets from cars and houses to aircraft and project finance.
“Islamic banks seem to be increasingly focused on real estate and asset finance but not moving into other financial or liquid instruments with active secondary markets. Perhaps we can take this opportunity to look at the challenges facing Islamic banking and see how the industry, its regulators and stakeholders may respond.”
The first challenge is the success of Islamic banking.
The sensational growth that has brought Islamic banks such high profits over the past five years coupled with high levels of liquidity have meant that Islamic banks have not had to fight for funding or ideas.
The result is that we are seeing too many Islamic banks with the same business models and structures, he said.
“Many Islamic investment banks are project-driven and do not have a steady source of “bread and butter” revenue to tide them over any slumps in economic activity. This is in contrast to many of the major conventional banks with loan books, overdraft and credit card facilities to provide steady revenue to cover overheads and make profits. Another challenge facing Islamic banks is the multiplicity of Shariah boards and judgments,” Al-Maraj said.
“This leads to a lack of homogeneity for some products on the one hand, and a lack of uncertainty by clients as to whether a product developed in one jurisdiction is Shariah-compliant in a neighboring jurisdiction. Islamic financial products need some level of harmonization in terms of product features to gain mass acceptance,” the central bank governor said.
“Islamic banking has been growing so fast that it has been difficult for banks to find enough skilled or qualified staff. This is why the CBB has participated with Islamic institutions in Bahrain in setting up the Waqf fund to provide financial and technical support in upgrading current training programs and introduce new ones.”
The central bank governor further said a major issue which is growing in importance is Shariah compliance and how to provide a satisfactory framework to assure investors and other stakeholders that the activities of the bank are within the permitted scope of Shariah. Islamic banks have various mechanisms to ensure Shariah compliance in the products and activities of the institution.
“The first and most obvious body is the Shariah supervisory board. This body produces judgments or fatwas on products or structures that the bank intends to provide,” he said.
The next challenge is that of accounting standards, he said.