MANAMA, 19 June 2007 — Greater harmonization in accounting standards, prudential regulations, development of standardized instruments and practices is crucial for rapid growth and internationalization of Islamic finance, Central Bank of Bahrain Governor Rasheed Al-Maraj said yesterday.
He said the existing differences create additional costs for internationally-active firms and competitive distortions as well as reduce transparency for investors and counterparties.
In opening remarks at the second International Islamic Financial Markets Conference here, Al-Maraj said that the challenges being faced by the Islamic finance need to achieve greater alignment and convergence, without which the vision of deep and liquid global Islamic financial markets risks being compromised.
Organized by Bahrain-based IIFM under the theme “Developing the Global Islamic Financial Markets” at the Diplomat Radisson SAS Hotel, the conference has brought together 45 leading experts, regulators and bankers to discuss and share their views on challenges being faced by this rapidly growing segment of the global economy.
“Greater harmonization in vital aspects of Islamic finance will help sustain the rapid growth and internationalization of Islamic finance. Of course, this is a challenge facing conventional finance as well. But the relative newness of modern-day Islamic finance means that the disparities in approaches in these areas are somewhat greater in this industry.”
“This issue has already been widely aired, and efforts are of course being made to narrow these differences — more on this in a moment. But broadly speaking further progress continues to be required and, I therefore, call on all jurisdictions to intensify their commitment to achieving greater alignment. For its part, the CBB will continue to provide its own strong support to initiatives aimed at narrowing these differences,” he said.
Al-Maraj added: “With respect to accounting standards, the policies set by AAOIFI, the Accounting and Auditing Organization for Islamic Financial Institutions, provide a solid framework for Islamic financial institutions. Bahrain is one of the few jurisdictions to have made its standards mandatory, although others use them as guidelines. Further promulgation of these standards would help increase consistency in accounting and Shariah standards.”
“In the field of financial regulation, we support the work of the Islamic Financial Services Board in developing various prudential standards, and would encourage other jurisdictions to also commit to implementing these standards over time. The third critical pillar under this heading is that of developing standard contract designs and associated documentation. Progress here will help address the concerns sometimes expressed about the impact of different Shariah rulings on the structuring of instruments, and the lack of certain types of instruments. It will also be instrumental in encouraging more liquid Islamic capital markets,” Al-Maraj pointed out.
“This critical third pillar, I should like to pay tribute to the sterling efforts now under way within the industry, with the leadership of the IIFM, to tackle these issues,” he added.
The chairman of IIFM, Khalid Hamid, dealt on the major initiatives and project being developed under the guidance of IIFM, including the development of the Islamic hedging framework agreement and the treasury murabaha master agreement, which are being developed in consultation with Islamic banks and other market participants.
Khalid Hamad, an executive director at CBB, said “Islamic hedging is a challenging issue and the framework document is important for industry and with the contributions from the market participants the objectives can be realized. The institutions that have developed certain hedging products will come forward for the benefit of the industry and not tae these efforts as competition. In this regard the strategic alliance with ISDA is mutually beneficial and the right step towards integration of the industry.”
He also said the first draft agreement for Islamic hedging project has been completed and currently being reviewed by Shariah side.
He added “the next stage will be an introduction of an Islamic hedging product and another challenging task undertaken for the Islamic industry by IIFM is the treasury Murabaha master agreement. IIFM is playing a role in providing transparency and robustness. The structure paper for the project is waiting for Shariah inputs and drafting by legal counsel will commence soon after. In this project, the aim of IIFM is to cover all vital and comprehensive aspects of documentation, trade, operations, accounting and legal aspects and key arrangements.”
“In addition, the IIFM is exploring the development issues of Islamic primary and secondary market issuance and infrastructure development,” Al-Maraj said.
