“In the past 30 years we have seen the growth of a truly global financial system. Financial markets and institutions no longer stop at national borders. For example, the amount lent by banks cross-border in 1983 was $703 billion. By 2008, the year that the financial crisis became global, that figure had risen to $20 trillion. The trends in the banking market were followed by trends in other sectors of the financial industry,” Rasheed M. Al-Maraj, Governor, Central Bank of Bahrain (CBB) told the delegates of the 18th World Islamic Banking Conference (WIBC).
The WIBC being held at the Gulf Hotel Bahrain has attracted over 1000 delegates making it one of the largest gatherings of the Islamic finance in the world.
“The Global Financial Crisis began over three years ago, it is essential for the future development of the Islamic financial industry that it learns from the mistakes of interest based finance. This includes making sure that it is based on secure regulatory foundations,” the Governor said.
“There are some signs that the shareholders of large global banks, as well as their regulators, are putting pressure on them to downsize and simplify their operations. Some banks have reduced the scale of their overseas activities after the crisis. Law makers in Britain and the United States have been looking at ways of separating the deposit-taking and lending activities of banks from their other operations. And regulators are pressing banks to come up with so-called “living wills” – to plan for the possibility that the bank might fail,” Al Maraj said.
“The greatest progress has, however, been made in writing new regulations. At the end of last year the Basel Committee on Banking Supervision published its new Capital Framework for internationally active banks, known as Basel III,” he said.
“Basel III tries to do several things, but its main aim is to ensure that banks have bigger capital and liquidity buffers, so that they will be less highly leveraged than in the past. When a bank could operate at a leverage ratio of $1 of equity to every $40 of assets, it was clearly too highly leveraged. It meant that losses of as little as two percent on the bank’s asset portfolio could wipe out its entire capital. The Basel Committee has, rightly in my view, set out to make sure that in future banks will not be able to operate with so little capital relative to their assets.”
“Islamic finance has been a relative-newcomer to the globalization trend. The industry itself is still comparatively young, having hardly existed 30 years ago. Since then it has recorded impressive rates of growth, but even today’s $1trillion industry is still relatively small on a global scale. Even so, the Global Financial Crisis has given the Islamic financial industry a great opportunity. The obvious flaws in conventional finance have created great interest in the Islamic financial model. This should provide the basis for the industry to sustain a period of strong growth for the rest of this decade. The growth opportunities are especially strong as Islamic finance has its largest presence in rapidly growing economies that have been least affected by the Global Financial Crisis. They should continue to register high rates of growth in the years ahead,” he said.
“If Islamic finance is to make the most of these opportunities, it still needs to learn from the mistakes of interest-based finance. As Islamic financial institutions expand, they need to make sure that their management and control functions keep pace with their growth. As the Global Financial Crisis shows, there is a need for firms, especially those that become internationally active, to make sure that risk management, control systems, and IT are capable of providing an accurate picture of a financial institution’s overall risk profile,” he said.
“The regulatory framework needs to keep pace with an expanding industry. The Islamic financial industry is fortunate in that it has several well-established standard setting bodies, including the Islamic Financial Services Board, the International Islamic Financial Market, and the Accounting and Auditing Organization for Islamic Financial Institutions. Over the years, these standard setting bodies have demonstrated their ability to adapt international standards to the needs of the Islamic financial industry. These bodies now need to take the lead in adapting the new international standards, including Basel III, to the specific circumstances of Islamic finance. Ensuring that firms have strong capital and liquidity buffers should not be seen as an optional extra for the industry, but as an essential foundation for its next stage of growth. The industry will be stronger if it strengthens its foundations, just as the foundations of interest-based finance are now being strengthened,” he said.