The summit theme, "Global Financial Architecture: Challenges for Islamic Finance," attracted participants from many countries including for the first time banking regulators from Luxembourg, Sweden and Mauritius. This was also the last summit convened by Professor Rifaat Ahmed Abdel Karim, in his capacity as secretary general of the IFSB, whose mandate is to set prudential and supervisory standards for the global Islamic finance industry.
CBB Gov. Rasheed Al-Maraj confirmed that this is Professor Rifaat's last year in office and thanked him for his huge contribution in establishing and developing the IFSB since 2002. The fundamental question that the Islamic finance industry needs to ask, said Gov. Al-Maraj, "is to what extent has the global financial crisis been a game changer for Islamic finance as well as for conventional finance? It is important that the Islamic financial industry learns lessons from the crisis and that it amends its business practices accordingly."
Al-Maraj said that there was a long shadow hanging over the sukuk market for instance in the light of the first defaults in sukuk which raised many questions relating to the right of sukuk holders. "Until these legal questions are resolved," he warned, "there will be a long shadow over the sukuk market. The further development of this market depends on finding legal certainty and developing mechanisms to deal with issuer defaults."
Sabir Mohammed Hassan, governor of the Central Bank of Sudan and the current chairman of the IFSB Council, warned that the lack of liquidity management schemes puts IFIs at a comparative disadvantage compared with their conventional counterparts. He urged regulators to introduce such schemes and to provide a supportive environment for IFIs and their products. He also called on the various countries to strengthen their Islamic finance regulatory and legal frameworks, and stressed that there is an urgent need to harmonize Shariah interpretations and to expedite the process of convergence between different legal frameworks.
Rifaat highlighted the latest developments in global financial and prudential regulation including capital frameworks and liquidity risk regulation, which, he stressed, should also apply to the Islamic financial services industry (IFSI). However, any development of a new set of financial reforms must take into account the specifications of Islamic finance if the twin objectives of global financial stability and sustainable economic growth are to be met.
Rifaat also called for better data collection on key Islamic financial sector vulnerabilities relevant for financial stability analysis. "Looking ahead, in tandem with the expansion of the IFSI, the Islamic finance industry is expected to grow in size and complexity. This would pose further challenges to regulatory authorities faced with the need to constantly upgrade capabilities to detect promptly the build-up of financial fragilities and to address these risks effectively," he concluded.
The governor of Bank Negara Malaysia, Zeti Akhtar Aziz, in a speech read out on her behalf by Deputy Gov. Razif Abd Kadir, said that in the last decade Islamic finance has evolved into a complete and competitive form of financial intermediation, effectively serving consumers and businesses, both Muslims and non-Muslims; it has seen significant milestones being achieved in the area of the international Islamic financial infrastructure and in the area of human capital development; and the sector has assumed an international dimension in which it is becoming an increasingly important part of the global financial landscape.
Whilst there is general support for the reform measures, there is also concern on the dangers of over-reaction by policymakers that could undermine the role of financial intermediation, and adversely affect the ultimate objective of economic growth and development. The concern is specifically on the unintended consequences of the regulatory reform.
"Financial stability," explained Zeti, "is not an end in itself; it is a means toward achieving the ultimate goal of sustainable growth and shared prosperity. This presents the challenge for policymakers in finding the appropriate balance between preserving the resilience of the financial system versus maintaining the ability of the system to perform their intended function of delivering effective, efficient and innovative financing solutions to customers in the wider economy. Hence, the concern is that the regulatory reforms would increase the cost of financial intermediation. These considerations are equally relevant in the context of Islamic finance."
The assessment on the aims and relevance of each of the proposed reform measures needs to take into account the two important considerations in Islamic finance; the need to support sustainable and responsible innovation, and secondly, to leverage on its inbuilt strengths that set Islamic finance apart in performing its role in supporting the efficient mobilization and allocation of resources to generate real economic activities.
Zeti also called stronger international cooperation in the pursuit to preserve global financial stability, particularly in the light of an enhanced internationalization of Islamic finance. A stronger collective effort needs to ensure that Islamic finance is subject to consistent, high-quality regulation across borders through the application and enforcement of the international prudential standards promulgated by the IFSB.
As Islamic finance becomes a growing component of the international financial system, it will become important for the ongoing global engagement by the international community that is driving the financial reform agenda to be extended to the perspectives of financial stability in the Islamic financial system, she added.
