Minister of Finance Shaikh Ahmed bin Mohammed Al Khalifa yesterday said Islamic banking has emerged as a mature banking sector but there was still need for more to be done on both regulatory as well as on product-development sides.
The minister in his opening remarks at the annual Islamic Banking and Finance Conference 2005 said the development of Islamic Finance: Banking and Insurance over the past quarter century has been very important for the region and for the financial industry as a whole.
Organised by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in co-operation with the International Monetary Fund (IMF), the two-day conference provides ample opportunity to experts, Sharia scholars, bankers and policy-makers to put together recommendations and a work plan for the Islamic banking industry. The minister said that Islamic banking has made possible the development of Sharia-compliant products and instruments.
"This has enhanced the scope of banking and insurance services by offering competitive investment opportunities. Encouraging the growth of Islamic finance and providing an appropriate regulatory framework for its development was a very important task for me in my last position as governor of Bahrain Monetary Agency," Shaikh Ahmed said.
"Two key elements for building the confidence needed for maintaining the growth of Islamic finance are good people and good regulation, such as AAOIFI which is organising this important event and has played a critical role in these two areas since its establishment in Bahrain 14 years ago. In its role of developing and issuing standards on accounting, auditing, governance, ethical and Sharia-related matters, the organisation has worked closely both with regulators and industry practitioners to support a sound regulatory system.
"Through its training and professional qualifications AAOIFI has helped expand the number of qualified personnel and strengthened the knowledge base in Islamic financial institutions. IMF is the organisation's conference partner and is co-hosting the event. This demonstrates the fund's recognition of this growing financial industry and organisation's role within it," Shaikh Ahmed said.
"We want to see substantial further growth in the Islamic financial market. The development and marketing of Sharia-compliant products, services, securities and other instruments will have to take account of the need to be competitive with conventional banking and insurance. Regulation of Islamic financial institutions will also need to take account of Basle II requirements on capital adequacy and risk management.
"There'll be challenges and opportunities here for the development of Sharia-compliant instruments to mitigate risks and enhance capital efficiency. Beyond this will be the challenge and opportunity of widening and deepening the market for financial services, particularly, but not exclusively, in the Islamic world," said Shaikh Ahmed.
BMA Governor Rasheed Maraj in his opening remarks said the agency has earned for itself a strong reputation as a regulator and has also proved active in supporting market innovation, particularly in the field of Islamic finance. "This is an impressive legacy, that I'm fully committed to carrying forward. Today, Islamic finance is losing its niche status and achieving significant recognition from the global financial industry.
"Its overall growth is currently estimated at around 15 per cent per annum with Islamic finance-related assets pegged at up to $500 billion. Last year saw the launch of a fully fledged Islamic retail bank in a Western country, and further progress has been made in developing new products and markets, with takaful now emerging as a potential significant new area of growth.
"So, where do we go from here?," Maraj asked. "For our part, BMA will continue to focus on developing a strong regulatory and supervisory framework, fully consistent with international standards, as the best guarantor of continuing success for Islamic finance. The Minister of Finance has just noted that good regulation is fundamental to maintaining future growth in the industry.
"Without it, the financial stability of Islamic banks, the confidence of their customers and the international credibility of Islamic finance may all be undermined. Concrete results will be seen in a number of areas. First, we're about to publish, later this month, volume 2 of our BMA Rulebook, which will contain all our regulations relevant to Islamic banking including elements previously contained in our Prudential Information and Regulatory Framework for Islamic Banks.
"These various regulations have been brought together into a single, comprehensive volume with the objective of enhancing the transparency and accessibility of our requirements," Maraj said. "Secondly, we've also been working over the past 18 months to develop a new regulatory framework for the insurance industry, following the transfer three years ago of regulatory responsibility for this sector to BMA.
"These regulations are now essentially finalised and will also be published later this month, as volume 3 of the BMA Rulebook. These regulations, amongst other things, will address in a comprehensive manner the specific characteristics of takaful.
"They'll represent, therefore, the first such rulebook for takaful and will, we believe, be the first such to include specific requirements geared to takaful. Thirdly, we're about to start work in earnest on the implementation of Basle II following the recent finalisation of the revised Capital Accord," said Maraj. "You'll hear about our plans in this area in a bit more detail in a later presentation.
"This'll be a major project, during which we'll, of course, consult fully with the industry. Part of the project will be to tailor Basle II to Islamic banks. In so doing we'll revisit all our existing prudential requirements for Islamic banks and see where these can be sensibly streamlined, not just where we may need to strengthen them.
"Looking beyond regulation, BMA will continue to emphasise the need to develop people as an essential component of a self-sustaining and healthy industry. Work on implementing the vision of an internationally recognised Islamic financial training, educational and research centre will shortly get underway," Maraj said.
"And BMA, as always, will remain open to suggestions from the industry itself as to how we can facilitate market development and innovation. The agency has a full agenda but, if implemented, it'll, we believe, provide further underpinning to the healthy development of the industry.
"I look forward to hearing your views during this conference and wish you an interesting and challenging two days." AAOIFI chairman of the board of trustees Shaikh Ibrahim bin Khalifa Al Khalifa said challenges which Islamic finance are facing are the challenges of success.
"With growth in the business of 15 per cent a year, we need to develop still more retail, wholesale and treasury products and services. The agenda for this conference has been built around the key areas where further innovation is required. Much progress has already been achieved in developing new products and markets.
"But the pace needs to be accelerated. This conference provides an excellent opportunity for scholars, practitioners and regulators to share their existing experience and brainstorm for the future," said Shaikh Ibrahim. "We want to look in particular at the development of further Shari'ah-compliant derivative instruments, at the issue of hedge funds and at instruments to manage and mitigate risk and help the capital invested in Islamic financial institutions go further and support more business.
"In this context, it's important to consider factors which rating agencies will take into account in rating both institutions and their individual major issues. On the banking side, this relates both to good governance and capital adequacy. We'll have an important discussion tomorrow on the implications of Basle II for Islamic banks.
"Whilst Islamic finance products have been developed over more than a couple of decades, Islamic insurance and reinsurance are newer developments. But they offer particular promise and can have a major role to play in areas such as the use of mortgages to expand home ownership," Shaikh Ibrahim said.
"For both banking and insurance, we need to look at marketing techniques to encourage the take up of new products and services. There are real opportunities in the region and in the Islamic world to widen and deepen reliance on banking and insurance.
"Discussions we have over the next two days will be of great benefit to AAOIFI in its role of setting standards and providing the industry with qualified personnel. Membership in the organisation has been growing fast. There are now more than 115 members from 27 countries," Shaikh Ibrahim said.
"We very much welcome this support but recognise the duty and responsibility it carries with it. There's a big challenge for AAOIFI to keep pace in its standard-setting work with developments in the industry.
"We'll continue to work closely with regulators and the industry to enhance the regulatory system. We're pressing ahead with the planned certified Islamic public-accountant programme recently approved by the general assembly in Tehran," Shaikh Ibrahim said.
"We also need to carry forward the certification and fellowship programme for internal Sharia supervisors approved by our Sharia board. This is a heavy agenda for AAOIFI. But with your help we'll carry it through.
"This conference can make a major contribution to the task we all share to develop a competitive Sharia-compliant banking and insurance industry. Thank you for coming. Please help us make this a really productive two days," Shaikh Ibrahim said.
Bahrain Tribune 2005
