MANAMA: A robust regulatory regime can help in establishing a well-functioning, stable and sustainable Islamic financial system.
H. E. Shaikh Ebrahim Bin Khalifa Al Khalifa Chairman of AAOIFI Board of Trustees in his opening address during the two day AAOIFI – World Bank Annual Conference on Islamic Banking and Finance being held at the Ritz Carlton Hotel, Manama, Kingdom of Bahrain said that the discussions will help AAOIFI and the industry in our effort to develop robust standards for Islamic finance, and ultimately to establish a well-functioning, stable and sustainable Islamic financial system.
HE covered three important aspects of the Islamic finance namely the ever-increasing importance of Islamic finance in the new financial world; the future of Islamic finance that I dream and the importance of financial inclusion at broader levels, and the role that Islamic finance shall play in this respect and the importance of standardization in Islamic finance, if this industry has to grow beyond border and beyond limits.
“Total Islamic finance assets are estimated at around $2 trillion, practically a ten-fold increase from a decade ago, and outperforming the growth of conventional finance in many places,” HE quoting Ms. Christiane Lagarde Managing Director IMF in her speech in Kuwait last month, said.
HE said that the IMF Chief highlighted the importance of the most important aspects including inclusivity and stability.
Indeed, HE said, Sukuk for example is no more just a Muslim’s heritage, with issuances by several governments of non-OIC countries – including the likes of UK, Hong Kong, Singapore, Luxembourg, and South Africa and a state of Germany, Saxony-Anhalt. This indicates the growing popularity as well as acceptability of Sukuk and the Islamic finance industry as a whole as a key segment within the global financial universe.
“It is also worth noting that in the regions with greater presence of Islamic finance or the greater demand for Islamic finance, there is huge infrastructure development and opportunity. Additionally, the economic development levels for such regions are far below saturation point. This provides a great potential for leveraging the Islamic financial services, and bridging the demand and supply gap.
“Moreover, it may be noted that in a number of developing countries, particularly, with large Muslim populations, a majority of the public still remains underserved or unserved by the financial services segment. This again creates a huge potential for Islamic finance to develop and foster. On this point, the financial inclusion, I want to touch upon a little bit.
“Today, I would however, like to focus on the aspect of inclusivity or inclusion as I truly believe that it is a role for Islamic finance that it has to provide more inclusive financial models for the whole world in general, and of the Muslim Ummah in particular.
“Today, the Islamic banking industry has less than 90 million consumers. In contrast, the quick-wins Muslim consumers are more than 1.7 billion and the total GDP of OIC markets is now in excess of 7 trillion US dollars. And of course, since Islamic finance is not for Muslims only so our target market is even bigger.
It is worthwhile to note that if we refer to the World Bank data on financial inclusion for 2015 we may observe that the public access to the financial institutions accounts for highly Muslim populated Middle East and South Asia regions are very low as compared to the world and other regional averages. In the Middle East, this average arounds 14% only.
“I imagine a tomorrow where we, as an industry, will be serving 250 million customers, or even more. I imagine a tomorrow where we would be at least 5 percent of the world’s financial economy. I imagine a tomorrow where we would be employing two million professionals and bankers, almost twice of what we have today.
“Ladies and Gentlemen, that’s right. I am saying 250 million customers. Some of you may say I am dreaming. But others would agree that this is very much an achievable potential of the industry if we want to remain relevant and meaningful to our economies tomorrow.
“I believe, we need to revisit the industry’s purpose of existence and the impact we are making today. I would humbly submit that there is a serious need for introspection here.
“For example, we need to ask ourselves which economic sectors will have the highest impact for our people, towards generating employment and economic activity. The prevailing oil prices require us to accelerate diversification of our economies. We have to ask which sectors create the ‘multiplier impact’ and are least dependent on government subsidies. We, as an industry, then need to align our Brand Islamic Finance more closely to help build these sectors.
“We also need to transform our brand to be more inclusive. For a very long time, we have only focused on exclusions. Yes, there is no compromise on leverage, interest, prohibited activities etc., but then we equally need to have a positive focus on supporting those businesses that are socially responsible and create a stronger economic impact.
“Finance cannot be isolated from the wider ethical and moral codes. We need to build financial and business models that seek to share risk more fairly, between our and future generations. Renewable technologies, fair labor practices, healthcare, smart cities, education, transportation, and infrastructure are some of the themes that demand our attention. The question remains whether we have the criteria, the structures and the tools in place, to embed these in our decision making?
Another priority as I see it, is for us to transform from being a ‘startup’ industry to more of a ‘growth’ play. Amongst the various aspects of the financial business, you will see that we have made impressive progress when it comes to Islamic commercial and retail banking. There is some respectable and ongoing progress on Takaful and capital markets front as well. However, many other components of the financial system beg our attention. I would like to highlight, for example, the small savers, the affluent wealth management, the pension and retirement plans, the Awqaf, the infrastructure segment and the trade finance business that are least attended.
“We have to urgently focus on completing this financial circle. The prize is sizeable. There is an estimated one trillion dollars’ worth of additional Sharia compliant assets scattered across these segments… this is in addition to the more-structured $2 trillion Islamic finance industry that we account for today.
“I would now like to share my vision on the role that Islamic finance standards can play for the development of Islamic financial universe while it is expanding at a phenomenal rate. You would appreciate that the qualitative improvements are no less important than the quantitative developments for sustainable growth patterns over longer periods of time and for broader spectrum. Accordingly, the justification and rationale for having international standards for Islamic finance, and a key role that the standards undertake, is to provide international market benchmark and operational guidance for Shari’a compliance, governance and control and the financial and related reporting.
“Needless to mention, this is especially critical, so that the market in general can truly understand as to what makes practices and products Shari’a-compliant and on one side the governance and control mechanisms are in place to keep its purity and on the other, these are treated, recorded, reported and analysed in a consistent and standardized manner cognizant of the very foundations of this business i.e. the faith behind it maintaining the trustworthiness of the system as a whole.
“AAOIFI has by now developed and issued a total of 94 standards – comprising 54 Shari’a standards, 26 accounting standards, 5 auditing standards, 7 governance standards, and 2 codes of ethics.
“The standards are developed and issued to achieve AAOIFI’s overall objectives to standardise and harmonise international Islamic finance practices and financial reporting, in accordance to Shari’a rules and principles, so as to support growth and expansion of international Islamic finance industry as well as to contribute towards building a robust Islamic financial system.
“I would like to share with you that at AAOIFI we are in a constant surge for improvement and development. Insha’Allah tomorrow we will be discussing our new strategies for accounting, auditing, governance and ethical standards and I believe that the collective wisdom of this august forum will augment the discussions by the presenters and the panellists in the upcoming sessions.”
