Global institutions call for strong Islamic banking regulations and supervision

Ethical and inclusive nature of Islamic finance make it a sustainable option

 Dubai: A high level forum on Islamic Finance in the Arab region on Sunday called for strengthening Islamic banking regulation and supervision.

It was organised by the Arab Monetary Fund and the International Monetary Fund, in collaboration with World Bank, Islamic Development Bank, Dubai Islamic Economy Development Center and the Dubai International Financial Centre.

“Islamic banking and financial services are playing a growing role in the Middle East economies. Thus it is in the interest of all stakeholders to strengthen these institutions in terms of regulations, institutional framework and supervision,” said Abdul Rahman Al Hamidy, Director General and Chairman of the Board of the Arab Monetary Fund.

Global institutions recognise the huge potential of Islamic finance, despite the relatively small share it has in the global financial system. Ratings agency Standard & Poor’s estimates global Islamic finance assets around $2.1 trillion (Dh7.71 trillion) at year-end 2015 in contrast to more than $7 trillion of cumulative GDP (gross domestic product) of the economies of the OIC (Organisation of Islamic Cooperation) countries. While the Islamic banking industry has an estimated 90 million consumers in contrast to 1.7 billion Muslims who could be potential customers.

“Undoubtedly there is huge untapped potential for Islamic finance and Islamic banking within the Middle East region and beyond. The World Bank is committed to all efforts in developing this segment of global financial services in terms of developing regulations, governance and prudential norms to realise the full potential,” said Alfonso Garcia, Director of Finance and Markets Global practice at the World Bank Group.

During the two consecutive days, the forum will highlight the growth of Islamic banks in Arab region and challenges that are facing supervisory authorities in strengthening Islamic banking services and related regulatory and supervisory mechanisms. The forum will also address regulatory and supervisory frameworks, particularly through enhancing corporate governance practices, implying liquidity management strategies as well as developing micro and macro prudential framework.

The high-level meeting will involve many sessions with focus on the actual regulatory and supervisory frameworks of Islamic banking in the Arab region, strengthening capital adequacy frameworks, liquidity management issues and the development of macro-prudential frameworks that suit the specific arrangements of Islamic banks. In addition, the forum will point to the implementation of Basel and IFSB corporate governance principals for Islamic banks.

The inclusive and ethical nature of Islamic finance combined with its anchor in real economy gives it the potential to emerge as a viable alternative to conventional financing. To be considered Sharia-compliant, a financial institution or transaction needs to meet tenets against usury and uncertainty. Perhaps the most famous principle of Islamic finance is the prohibition of Riba. Sharia doesn’t consider money as an asset on its own because it is not tangible; therefore, it may not earn a return from the simple fact of time elapsing. Instead, return can be earned on risk taking activities, as long as the burden or reward is shared between the bank and its client.

Sharia prohibits uncertainty of payout, gambling, or speculation (Gharar), and encourages responsible behaviour. Moreover, Sharia-compliant transactions must be backed by tangible and identifiable assets that anchor the financial sector in the real economy.

“The ethical and inclusive nature of Islamic finance combined with the principle of profit sharing makes it a sustainable option to reach out to the financing needs of long term infrastructure projects, small and medium enterprises, micro ventures and the unbanked segments of the society,” said Masoud Ahmad, Director of the Middle East and Central Asia Department at the International Monetary Fund.

As part of strengthening these institutions, Ahmad said attention should be paid to strengthen capital adequacy requirements, liquidity, risk management and cross border supervision while marco-prudential regulations should be introduced to strengthen and safeguard asset quality.

Copyright Reserved to Gulf News 2016

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