Mideast urged to unify Islamic finance norms

LONDON: Middle Eastern nations need to step up efforts to standardise regulation of the Islamic finance industry if they are to allow it to fulfill its growth potential and avoid disturbances, according to a senior central banker.

But while consistency is important, a one-size-fits-all approach isn’t appropriate, Khalid Hamad, executive director for banking supervision at the Central Bank of Bahrain, told Dow Jones Newswires in an interview during a recent trip to London.

“History has taught us that if we don’t have consistency and minimum standards across the board, there will be disturbances, there will be regulatory arbitrage,â€‌ Hamad said.
“Because of the absence of consistency, global problems happen. Crises are the result of the absence of standards,â€‌ he said.

The Islamic finance market is expanding rapidly. In 2007, a total of $19bn new sukuk – Shariah-compliant fixed-income securities – were issued in the Middle East, according to Zawya.com data. And global sales of Islamic bonds in the primary and secondary markets could top $100bn within two years as non-Muslims seek more funds from the oil-producing Arabian Gulf, Standard & Poor’s said in a report last week.

All countries supervising Islamic finance should adopt standards recommended by the Islamic Financial Services Board, an international standard-setting body for providers of Islamic financial services, Hamad said. He said the Bahraini central bank has been promoting and adopting IFSB standards, but most nations have yet to follow suit.

The Kuala Lumpur-based IFSB recommends a supervisory review process encompassing capital adequacy, risk management, internal controls, corporate governance and market discipline.

However, individual nations should be left to develop the details of their approach, said Hamad, who is a member of the IFSB Technical Committee.
“Co-operation, co-ordination, working hard on these standards is the only way,â€‌ he said.

He added that, out of fairness to those countries that have made progress in adopting regulatory standards, it is important that other nations close the gap.

If this doesn’t happen, some banks may be tempted to concentrate their operations in countries with less stringent regulations, which could damage the reputation of the industry as a whole.
“If all countries adopt the standards, institutions will be on a level playing field,â€‌ he said.

Turning to the economic outlook, Hamad said the collapse of the US subprime mortgage market has had only a limited impact on banks in the region.

He said Shariah finance provides indirect protection against excesses, since it is meant to contribute to the wealth of society as a whole. As a result, Shariah mortgages don’t face the same risk as subprime mortgages, he said, noting that the default rate in Islamic finance is very low.

“A few organisations have been affected by the subprime (crisis), but not directly. The magnitude was less than what you hear about the effect on US and European banks,â€‌ he said.

Asked to identify the greatest economic challenge to the Middle East, Hamad pointed to the maintenance of monetary stability.

To avoid imbalances, Bahrain, the United Arab Emirates, Saudi Arabia, Qatar and Oman, which all peg their currencies to the dollar, tend to move their interest rates in line with the Federal Reserve’s base lending rate.

However, the high rate of growth and inflation in the oil-rich Gulf states contrasts with the picture of slowing economic expansion in the US, where the Federal Reserve has cut its Fed funds rate by 125 basis points since the start of the year, in an effort to support growth. – Dow Jones Newswires.