www.saudigazette.com.sa - ISTANBUL — If you have any doubt that Islamic finance is creeping
into the mainstream global financial system where it matters, albeit
cautiously and perhaps in some instances even apologetically, then you
should have been in Istanbul last week.
Perhaps Turkey may not
be perceived as the natural bedfellow of the Islamic finance industry,
but contrary to popular misconception, next year will be the 30th
anniversary of the introduction of the special decree (No. 831/7506 of
16 December 1983 issued by the Council of Ministers) allowing the
establishment of Special Finance Houses (the euphemism for interest-free
Islamic banks).
Armed with the ambition of transforming
Istanbul into a regional and international financial center (and no
financial center these days can be complete without also offering an
Islamic banking and investment proposition) and with the sovereign debt
chaos emanating from the West European continent, Turkey like several
other countries is seeking alternatives to the unbridled market
capitalism responsible for the near meltdown. (source)
They want
alternatives that connect finance with the real economy and with
productive activities whether in the form of external borrowing
requirements; better managing of both micro and macro economic policies;
the financing of infrastructure and development; the financing of the
private sector including small-and-medium-sized enterprises; a
resilience to future financial and economic shocks and a contribution to
financial stability and GDP growth.
In fact Turkey
experienced its own financial crisis in 2001 and the lessons learnt then
have stood it in good stead. As the Turkish Minister of International
Development Dr. Cevdet Yilmaz stressed in Istanbul, not a single Turkish
bank has gone bust since the onset of the 2008 financial crisis.
Perhaps it is no coincidence that the World Bank Group has been
actively engaging with the Islamic financial system through its links
with the Islamic Financial Services Board (IFSB), which held its 9th
Annual Summit in Istanbul last week, and with the Islamic Development
Bank Group. Equally important, the International Monetary Fund (IMF) is
now including adherence to IFSB prudential and supervisory standards in
its Financial Sector Assessment Program (FSAP), primarily in
jurisdictions where such standards have actually been adopted.
Dr. Mahmoud Mohieldin, Managing Director of the World Bank, in his
keynote speech to the IFSB Summit, could be forgiven for adopting a
“carrot-and-stick” approach to the Islamic finance industry. “While
several features of Islamic financial institutions have enabled them
generally to fare better than their conventional counterparts these past
few years, there is no room for complacency. Several key areas that
connect with current global reform trends need urgently to be
addressed,” he advised. These include regulatory oversight, corporate
governance and insolvency frameworks.
While begrudgingly
acknowledging that the basic principle of risk sharing and the strong
linkages between the real sector of the economy and financial sector
protected Islamic financial institutions from the worst effects of the
crisis, and that as business partners, financial institutions are more
likely to assist borrowers in working through bad times, thus lowering
the pressure to sell assets at “fire-sale” prices and therefore reducing
the probability of contagion to the rest of the financial system, Dr.
Mohieldin returned to form, warning that despite the remarkable
expansion of the Islamic finance industry, it remains a relatively small
one accounting for a mere one percent of global financial assets.
While market depth and scalability are indeed immediate challenges for
the Islamic finance industry as Dr. Mohieldin suggests, he fails to
offer any glimmer of hope of how the very ethos of Islamic financial
intermediation can be worked into the very global reforms that the IMF’s
Financial Stability Forum and the Basel III provisions purport to
offer. Such recognition transcends mere market size or growth.
Nevertheless, the World Bank is right in terms of regulatory oversight
to urge the need for uniform enforcement of key regulatory prudential
and supervisory rules across jurisdictions. “We need to achieve a common
understanding of risk-sharing for Islamic finance globally, and how
rules would work, in practical terms on specific transactions, across
jurisdictions,” he added.
The current environment, he
suggested, presents a good opportunity to bring Islamic finance into the
broader debate on the strengthening of the financial system. For
example, Basel III poses challenges for Islamic banks operating
internationally and in jurisdictions that do not have regulations geared
towards the industry. At the same time, some have argued that Islamic
banks are already ahead of Basel III rules in many ways, holding more
equity and with a greater emphasis on common equity.
The
reality is that the increase in banks’ capital quality, consistency and
transparency under Basel III do not affect Islamic banks because the
Hybrid and Tier III capital that are affected by the changes have not
played a significant role in their capital structures.
The
capital structure of the majority of IFIs is dominated by Tier I capital
and common equity. In Tier II capital, the issue is how IFIs will meet
Shariah requirements before meeting the regulatory requirements for
instruments such as subordinated debt, hybrid capital, convertible
contingent capital (CoCos) and Sukuk that can be considered as capital.
On the other hand, liquidity is one area where Islamic banks are likely
to be significantly affected, principally due to the lack of liquid
Islamic instruments.
Good and effective corporate governance is
an essential component of Islamic financial principles, although in
practice there remains significant challenges, especially in the Shariah
Governance process including the Shariah Supervisory Boards (SSBs).
An important new suggestion from Dr. Mohieldin is worth considering.
That is to enhance the effectiveness of SSBs “by shifting their emphasis
from reviewing Shariah compliance to serving as the fiduciary guardians
of the customer’s rights, as quasi-outsiders who are providing
independent validation, in some ways analogous to external auditors”.
Indeed, the World Bank considers this a “priority area” and is in the
process of finalizing its “Supplemental Corporate Governance Guidelines
for Islamic Financial Institutions”.
Given the few Sukuk
defaults including exposure to the SAAD Group and Al-Gosaibi Sukuk, and
the actions in the London High Court and in Malaysia over the last few
years, insolvency regimes, including effective insolvency and creditor
rights, are a key priority. The World Bank proposes the establishment of
“a coherent system of insolvency rules and principles which are
consistent with the Shariah and are benchmarked against international
best practices.”
Dr. Mohieldin is confident that Islamic
finance can contribute meaningfully to financial stability through its
demonstration effect on risk sharing and keeping its “own house in
order”. Indeed recent empirical research at the World Bank suggests that
Islamic financial institutions fared better through the crisis that
gripped the world starting in 2008, than conventional counterparts.
Similarly, Islamic finance can play a key role in financial inclusion
which is high on the agenda of inter alia the G20 and G24 forums. The
World Bank recently launched its Global Findex which collects comparable
cross-country data on financial inclusion. The results are staggering –
some 2.5 billion people are unbanked, including about 75 percent of the
world’s poor.
Dr. Mohieldin reaffirmed the World Bank’s
commitment to play a positive role in the growth of the Islamic finance
industry which focuses primarily on knowledge sharing, support for the
development of standards and rules, and executing transactions through
its financing programs.
The Bank’s Islamic Economics and
Finance Working Group seeks to provide support to the industry in
capacity building and knowledge management; engagement on policy
directions in market development, regulation, standard setting and new
financial products; diagnostic and analytical work in Islamic finance;
and technical assistance on issues relating to legal, regulatory and
institutional frameworks as well as compliance with standards.
To date, the World Bank has issued a RM750 million Sukuk in Malaysia;
its private sector funding arm, the International Finance Corporation
(IFC) has issued a US$100 million Sukuk Al Ijara against assets in the
GCC region; and its Multilateral Investment Guarantee Agency (MIGA)
structured a US$450 million Murabaha facility for a mobile phone company
in Indonesia to improve the mobile network and to increase population
coverage; and MIGA underwrote US$27 million in guarantees to support the
construction of the Doraleh Container Terminal in Djibouti.
Source: http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentID=20120522124670 - May 23, 2012
