The consensus was predictably mature amongst regulators and dignitaries at the Sixth Annual Summit of the Islamic Financial Services Board (IFSB) held last Thursday and Friday in Singapore. These included the intrinsic strengths of the Islamic financial sector which supposedly puts emphasis on financing the real economy; that much work needs to be done to ensure the robustness of the industry; that future growth will only come with innovation, which in the light of the global financial crisis has assumed a certain negativity; and that to meet the future challenges of global financial services, the Islamic finance sector needs to be further regulated.
But behind the scenes amongst the market players attending the summit, there was an acceptance of inevitability that these ambitions will take time to realize because the very members of organizations such as the IFSB, the Islamic Development Bank (IDB) and others, still are not on the same wavelength when it comes to Islamic finance architecture; and that standards issued by the IFSB and the like are not legally enforceable but on the basis of voluntary adoption, a culture which at best is under-developed in the Muslim countries in general. In other words, at these summits countries with differing Islamic financial infrastructures are discussing issues which have not even been implemented in their own jurisdictions.
There was also disappointment that there was hardly any movement on such pressing challenges faces the global Islamic financial industry such as an urgent need for a global Islamic liquidity mechanism or inter-bank system for both short-term liquidity placements and for facilitating the needs of banks to invest their central bank reserves and other capital placements in a Shariah-compliant basis. Similarly, the vexed question of leakage and use of proceeds and of standardization is nowhere near resolving.
On the positive side, there is a growing realism as to the challenges facing the global Islamic financial sector and the steps that need to be taken to ensure its soundness and resilience to external and internal shocks. New entrants to the market such Korea are impressed about the value proposition of Islamic finance. “We truly believe that Islamic finance is a good innovation in the global financial market. We are committed to facilitating it in Korea. The global financial crisis has shown that financial services cannot be divorced from the real economy,” explained Kim Jong Chang, governor of the Financial Supervisory Service of Korea.
The current chairman of the IFSB governing council, Mohammad Al-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA), would certainly be in favor of leveraging such sentiments and opportunities. But Al-Jasser also tempered expectations warning that 2009 will see a slower growth rate in the Islamic finance sector, which had been growing between an estimated 20 percent to 40 percent over the last few years. “There are signs that 2009 will be a year of slower growth but we should stay in positive territory,” he stressed.
Al-Jasser rightly pointed out that Islamic finance is now moving to a new level and is now competing on its own merits in terms of attractive and competitive products and services in the global marketplace. But he warned against self-regulation and that the Islamic financial services industry similarly needed to meet global standards and best practices for risk management, capital adequacy, corporate governance and transparency. SAMA of course has been vindicated in its conservative approach in banking regulation and reigning in any adventures by Saudi banks in the subprime market for instance, with the result that Saudi financial institutions have virtually no exposure to the credit crunch and the subprime crisis.
IDB president, Ahmed Mohamed Ali, best outlined the concerns facing the Islamic finance industry. The industry is too concentrated on commercial banking and needs to diversify and provide a wider range of products and services. He called on investment banks to offer products that “have a positive impact on economic growth without compromising resilience and stability.” The sector, he added, needs more venture capital and SME financing. He also called for a systemic revision of the Islamic regulatory and accounting standards.
Zeti Akhtar Aziz, governor of Bank Negara Malaysia, chairing the closing session of the summit, stressed that Islamic finance needs to be further regulated as it is now becoming an increasingly important component in the international financial system. Regulation of banks is a major issue in the current crisis. In this context it was critical regulations that would ensure the soundness and stability of the Islamic finance system be developed.
Mush work needs to be done in building a robust future for Islamic finance. For IFSB secretary-general this means developing the liquidity, legal and database infrastructure of the industry. “It is important to ensure that our policy actions must always be responsive and attuned to the continuously changing landscape in financial regulation and supervision.”
