AMMAN, 19 May 2008 — Against a backdrop of an increasingly uncertain global financial environment underlined by a credit crunch due to investments in dodgy subprime US mortgages, and which has already impacted badly on the housing sector and threatening recession in the industrialized economies, the Islamic financial system is indeed “well-positioned” as a form of financial intermediation, stressed Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank.
While analysts are trying to make sense of how exactly the conventional global financial system sleep-walked into this latest global financial chaos, financial regulators from Muslim countries attending the 5th Islamic Financial Services Board (IFSB) Summit in Amman in Jordan a few days ago were only too aware that the sector needs to focus strongly on the implementation of global prudential standards and sound risk management practices in Islamic financial institutions to ensure the (ongoing) financial stability and integrity of the financial system.
“According greater mutual respect to global Shariah views for Islamic finance would also contribute to the orderly global development of Islamic finance, thus sustaining the overall viability and soundness of the Islamic financial system as it becomes an integral part of the international financial system,” advised Governor Zeti of Bank Negara Malaysia.
She added that with the increasing globalization of Islamic finance comes interdependence both with each other and with the wider global financial system; and the emergence of new challenges of more diverse Islamic financial institutions and complex structured financial instruments including hybrids of debt-equity structures, which in turn have contributed to the increasing complexity of the risk profiles of Islamic financial transactions.
However, the “intrinsic features of Islamic (faith-based ethical) finance,” explained Zeti, “also contribute to its overall resilience, which is derived from the Shariah principles, the key pillar of Islamic finance...which require that Islamic financial transactions be accompanied by an underlying productive activity resulting in a close link between financial and productive flows.”
She appealed for mutual respect in Shariah rulings relating to Fiqh Al-Muamalat through the application of mutually recognized principles and processes to deduce the Shariah rulings and views.”
Indeed in the history of Islamic jurisprudence, there has been a strong culture of mutual respect among Muslim jurists with multiplicity of Shariah opinions. The jurists from different Madhabs (schools of law) had high regard for differing views expressed by other jurists even in matters of Ibadah (worship).
Indeed, the IFSB prior to the summit had two public hearings in Amman on Exposure Drafts on Islamic Collective Investment Schemes (ICIS) and on Capital Adequacy Requirements for Sukuk Securitizations and Real Estate Investments. According to IFSB Secretary general Prof Rifaat Abdel Karim, it is hoped that the two exposures would be adopted as standards before the end of the year by the IFSB Governing Council.
These developments come at a time when Islamic finance is once again coming under a renewed attack both in the US and Europe. In the US, the Treasury has reportedly stressed that there will be greater scrutiny of the Islamic finance sector by US officials, as if they have been lax in a post-9/11 era and the advent of President Bush’s so-called ‘financial war on terror.’
More disturbing is the vicious attack by the secular US NeoCons on Shariah finance which one senior proponent in a recent article termed ‘financial jihad’ and where he desperately tried to link it to the bogey of terrorism, without offering a smidgen of proof of any such connection or conviction in any court of law. In the UK ironically, it is the liberal left that is trying to smear Islamic finance as a con trick and an attempt to consolidate the dominance of men in financial matters over women and secular Muslims.
In contrast, it is the East Asians, especially the Hong Kong Chinese, the Japanese and the Singaporeans that are taking Islamic finance seriously as a valid and worthy alternative system of financial management and investment. Not surprisingly they are opening up to Islamic finance in a potentially big way. Hong Kong, Singapore and Malaysia even had country showcases on Islamic finance as pre-summit events, which attracted much attention.
Eddie Yue, deputy chief executive of the Hong Kong Monetary Authority, confirmed that the Hong Kong government is committed to the long-term development of Islamic financial services in its jurisdiction both to attract investment through Hong Kong to be placed in the region and as a gateway to the Chinese Mainland, with its 3 billion strong market.
In late 2007, a local Hong Kong Bank launched the first Islamic Fund off the Dow Jones Islamic Market China/Hong Kong Titans Index, which attracted some US$50 million at inception. Last December, the Hong Kong Mortgage Corporation singed an agreement with Cagamas Berhad, the Malaysian national mortgage corporation, to set up a joint venture to develop mortgage guarantee business in Malaysia including in the Islamic mortgage space. Yue also confirmed that the Hong Kong authorities are looking at a report aimed at potentially introducing legislation or amendments to existing laws which would create a level playing field in tax and other reliefs for Islamic financial products compared with equivalent conventional products.
Hong Kong’s advantage, stressed Yue, lies in its strategic location; its deep and highly liquid capital markets; it being the natural choice as a hub for investing into China; the local expertise of Hong Kong firms in China; investment in China-related real estate through REITS listed in Hong Kong; and the fact that Hong Kong is the third largest financial market in the world after London and New York.
The message for the US regulatory authorities is that if they continue to let nefarious political and emotional agendas cloud their policy toward Islamic finance, US firms, traditionally the pioneers in structuring Islamic financial transactions, will inevitably lose out to the East Asians and the Europeans. This, especially as the focus of Middle East investment, including in the Islamic finance space, is shifting toward southeast and east Asia. This has already happened in the post-9/11 era and in the wake of the three Patriot Acts legislation which has shied legitimate Arab and Muslim investors away from the US market, albeit that some of them are now slowly returning to that market.
However, the latest uttering from the US Treasury and the NeoCons, who obviously have ignored the involvement of the World Bank Group, including the IMF and the IFC in Islamic finance, may well undermine this seeming rapprochement between Middle East investors and the US market.
As Hamad Al-Sayyari, the governor of the Saudi Arabian Monetary Agency (SAMA) stressed in Amman: “In the last two decades the world has seen a rapid growth in financial services including the Islamic financial services, essentially a system of financial intermediation. Hong Kong, Singapore, South Africa and the UK have all recognized Islamic finance as an acceptable form of financial activity. However, despite its rapid expansion, Islamic finance is still in its infancy and comprises only one percent of global financial assets.”
