The ability for Islamic finance to compete requires financial strength and a wide constituency of stakeholder confidence, according to a top official at the Central Bank of Bahrain (CBB).
“Financial strength requires banks to have larger balance sheets to enable them to compete at the top table. That is reliant upon an increase in the capital of institutions. A major influx of funds to the industry is required, underpinned by a deep understanding of the changing financial landscape to invest wisely for the future,” Rasheed M. Al-Maraj, Governor, CBB told the audience during the opening session of the WIBC 2013.
“Stakeholder confidence is built upon demonstrably effective frameworks. The industry needs a consistent interpretation of Shari’a, linked with an acceptance of the principles of Shari’a into the judicial system of major financial centres; standardized product documentation; and changes to the business model to facilitate diversification of products and services to provide a more attractive proposition to customers,” he added.
“These initiatives are vital if we are to compete internationally, attract better skilled resources, and participate as equals with existing regional financial institutions,” he said.
“Extending the reach of Islamic finance into new and developing markets is also extremely critical. Many countries have now recognised the potential, and a recent conference in London has ignited serious interest in many parts of the Western world. All of these developments are positive, but we must be ready to optimise the opportunities at hand if the industry is to grow sustainably,” Al Maraj added.
“These are laudable, although extremely challenging objectives. The road map is complex; it varies in detail from one institution to another; and from one jurisdiction to another. A successful road map will take into account the dynamically changing landscape facing the industry as a whole, and the Islamic finance industry in particular.
“Put in simple terms, the Islamic finance industry requires a transformation.
“No transformation can be fully achieved with any confidence unless it is underpinned by an appropriate, well founded, globally accepted, regulatory framework and agreed upon international standards of practice. A framework of this nature must be sufficiently robust to bring consistency of approach, whilst at the same time it must be sufficiently flexible to accommodate the regional and local environment. This presents a major challenge, but more importantly offers the opportunity for sustainable and significant success,” he explained.
“Best practice corporate governance, including transparency of operations, lies at the heart of all business frameworks. The Basle Committee initiated consultation in respect of governance and Board sub-committee structures, including the extremely sensitive but absolutely key area of the remuneration structure. Many regulators have accepted the challenge, and this will change the culture of the industry to one which provides a clear link between remuneration and performance, with an emphasis on long-term performance measures rather than short-term personal gain. CBB has recently issued new directives for sound remuneration practices for all licensed banks in Bahrain.
“Transparency and disclosure standards are being strengthened in order to make financial reporting more easily and readily understandable, as well as to provide a greater amount of more useful data to stakeholders.
Basle III requires banks to hold more Tier 1 capital, incorporating the lessons of the recent past which have clearly demonstrated the need for banks to have adequate liquidity to sustain operations during any crisis.
“The composition of Balance Sheets is changing in the wider industry, with both conventional and Islamic banks making fundamental changes to their business models.
“The overall outcome is that Islamic finance is benefiting from these changes. The over-reliance on real estate and infrastructure projects is being systematically replaced with recognition that revenue-generating assets, which in turn provide identifiable, sustainable profits for the future, are the way forward.
“The new models shall both encourage and support the introduction of increased venture capital. If this is used to help SMEs to grow and develop, the potential is clear.
“Risk management practices continue to be highlighted and incrementally improved, including the implementation of more easily understood risk/reward methodologies, and a demonstrable link between successful management of risk and a successful business outcome.
“The growing sophistication of stakeholders will demand best in breed Internal Audit, Compliance, and Risk Management principles and practices to be implemented.
“Integral to all of these initiatives and opportunities is the importance of Shari’a. A greater number of Shari’a Scholars are required; Shari’a Reviewers must be further trained and provided with career development opportunities. Consistency of approach and understanding should be the watchwords. Islamic financial institutions need to quickly address these issues.
“Moving specifically to Bahrain, the CBB’s financial sector development strategy has been, and shall continue to be, focused on the following areas:
“To maintain and enhance the CBB’s leadership in the development of Islamic finance through a continuous programme of providing thought-provoking ideas and suggestions; and dialogue with the industry; to maintain our robust regulatory standards, and to continue to develop these in line with international standards; To work closely with the industry, the Waqf Fund and BIBF on further developing the human capital which is so vital to future success; to encourage mergers and acquisitions aimed at strengthening the resilience of locally incorporated banks in the Kingdom; and to encourage our licensees to adopt best practices in every avenue of their work, with an emphasis on corporate governance practices, transparency of reporting, risk management, internal audit and compliance,” CBB Governor added.
“Islamic finance has come a very long way in a short space of time. I urge everyone with an interest in Islamic finance to work together to make the transformation real,” he said.