Plugging more deeply into global financial services, achieving a greater degree of standardisation and being more innovative in product and service offerings, will be key challenges for Islamic finance, according to several speakers at the 3rd Islamic Financial Services Board (IFSB) Summit in Beirut in May. The conference was attended by some 200 central bankers and Islamic finance leaders, held under the patronage of Mr Fuad Siniora, President of the Council of Ministers, Lebanon, and hosted by Banque du Liban.
The IFSB Summit, with the theme “Aligning the Architecture of Islamic Finance to the Evolving Industry Needs”, is one of the most prestigious annual gatherings of regulators, bankers, scholars and practitioners in the Islamic financial services industry.
Dr Habib Al Mulla, Chairman of the Dubai Financial Services Authority, said: “The Islamic financial services industry should seek to be as innovative as possible in terms of the products and services that they offer. The industry would greatly benefit from the standardisation of Islamic services and products, and this would promote greater consistency across the industry.
“Islamic firms would benefit by being able to respond more quickly to the needs of clients, and not be delayed by the legal and Shariah approval process. Innovation within the pre-defined concept of Islamic finance should be encouraged through flexible yet well defined laws and regulations.”
He warned, however, that to have different standards for Islamic institutions for the sake of differentiation could result in Islamic firms being put at a competitive disadvantage. “Our role is to encourage the growth of the industry and not create hurdles,” he said.
More Money Market Tools Needed
Money market instruments are identified as key tools in developing sufficient depth of liquidity for the Islamic financial services industry. However, currently, the industry still has a long way to go before this expectation is satisfied, according to speakers at the summit.
The three panelists, including Dr Mohammed El-Qorchi of the International Monetary Fund, at “Systemic Liquidity Arrangements and Macro Policy” session, were unanimous in calling on monetary authorities to increase their efforts to establish the necessary infrastructure to promote the soundness and stability of the Islamic financial system, especially through mechanisms such as interbank money market and lenders of last resort.
Professor Rifaat Ahmed Abdel Karim, the Secretary-General of the IFSB, said that an Islamic Money Market Task Force to look into the relevant issues and recommend viable solutions that could help monetary authorities in forming their policy decisions had been set up.
He also identified the limited availability of worldwide statistical information on the Islamic financial services industry as making it difficult to assess the growth of the industry globally in a more accurate and holistic manner.
The IFSB has embarked on an initiative with the support of the Islamic Development Bank and Asian Development Bank to establish a database of global prudential and financial indicators in the Islamic financial services sector.
This would help to standardise measurement methods and reporting structure, thereby promoting international data comparability. The end goal was to facilitate monitoring of the soundness and stability of the industry through a set of indicators and help strengthen transparency, he added.
More Disclosure Needed
Mr Sabir Mohammed Hassan, Governor of Bank of Sudan, called for a stronger disclosure regime for Islamic banks in line with internationally recognised standards in order to reinforce public confidence.
Dr Ishrat Husain, a former Governor of State Bank of Pakistan, emphasised that institutions offering Islamic financial services could only be competitive against their conventional counterparts if they themselves adopted internationally accepted best practices.
Mr Thomas J Baxter, General Counsel and Vice President of the Federal Reserve Bank of New York, admitted that while there were a few major regulatory hurdles which needed to be overcome before an Islamic bank could be licensed to operate in the US, none of them was insurmountable with carefully thought-out legal solutions.
Being SMART about the Law
Specific, Measurable, Attainable, Realistic and Time-bound – these are the cornerstones of an effective legal infrastructure for the Islamic financial services industry, according to Mr Neil D Miller, a Partner of Norton Rose, London. Noting suggestions that the standardisation of financial contracts may reduce costs and risks of Islamic financial products, he opined that standardisation had a limited role in meeting legal objectives. It has to be done selectively in order to avoid hampering innovations in the Islamic financial services industry.
Need for Timely Information
In the session on “Infrastructure for Good Governance and Market Discipline”, speakers conceded that market discipline could only be effective in an environment where there was timely and adequate information flow. The Islamic financial services industry is still perceived as a laggard in this area.
Greater Transparency
Accounting expert, Professor Simon Archer of Surrey University, UK, said that most institutions offering Islamic financial services (IIFS) operated in a weak information environment where information intermediaries, such as financial analysts and journalists as well as credit assessment institutions, were generally lacking.
He called for improvements in accounting and auditing practices of IIFS which, to a certain extent, should be more extensive than the requirements of the International Financial Reporting Standards.
The Vision – Still a Long Way to Go
In the closing session on “Vision and Prospects”, panelists including Dr Ahmed Jachi, First Vice Governor, Banque du Liban; Mr Charles Enoch, Deputy Director, IMF; and Mr Wafik Grais, Financial Sector Adviser, World Bank, said that despite the many inroads made in recent years, the Islamic financial services industry still needed to overcome several key challenges relating to capital adequacy, risk management, governance and market discipline, liquidity management as well as harmonisation of Shariah practices.
They stressed the strong need to continue adding depth to capital market development, financial engineering as well as product innovations, in order to remain competitive against its conventional peers.
The consensus was that the industry requires solid and coherent regional and international co-operation and integration before it can be fully recognised as an integral part of the global financial system.
The general consensus at the summit was that Islamic finance had grown from a niche market to being a major component of the global financial system.
The message as encapsulated by Mr Daud Vicary Abdullah, MD of Hong Leong Islamic Bank is: “Keep the message simple to let the customers understand.”
The next summit will be held on 15 & 16 May 2007 in Dubai, to be hosted by the Central Bank of United Arab Emirates. The theme will be “The need for an integrated approach to the supervision of Islamic financial services”.