IFC fo­rum for global di­a­logue for sus­tained growth of Is­lamic fi­nance: CBK gov­er­nor

Kuwait Times - - LO­CAL - —KUNA

KUWAIT: Gover­nor of the Cen­tral Bank of Kuwait (CBK) Mo­ham­mad Yousef Al-Hashel said the Is­lamic Fi­nance Con­fer­ence (IFC) to be hosted by Kuwait to­day can pro­vide a fo­rum for global fo­rum to de­velop a vi­sion for the sus­tained growth of the Is­lamic fi­nan­cial in­dus­try.

The con­fer­ence will build a plat­form for con­tin­ued work in or­der to fur­ther cul­ti­vate and ex­ploit the core com­pe­ten­cies of Is­lamic Fi­nance that make sus­tain­able growth pos­si­ble, he said in an in­ter­view with the In­ter­na­tional Mone­tary Fund (IMF) pub­lished on its web­site yes­ter­day.

Although still a com­par­a­tively small share of all global fi­nan­cial as­sets, the role and rel­e­vance of Is­lamic fi­nance in the global fi­nan­cial sys­tem is gain­ing sig­nif­i­cance, he added. He noted that the first theme con­cerns in­creas­ing fi­nan­cial in­clu­sion through ac­cess to fi­nance, which is vi­tal in stim­u­lat­ing the econ­omy and im­prov­ing the wel­fare of the un­der­priv­i­leged, adding re­search sug­gests that over one third of the world’s adult pop­u­la­tion-about 2.5 bil­lion peo­ple-lacks ac­cess to for­mal fi­nan­cial ser­vices.

Is­lamic fi­nance can help rem­edy this sit­u­a­tion by pro­mot­ing Is­lamic mi­cro­fi­nance, fi­nanc­ing to small and medium-sized en­ter­prises, and mi­cro Taka­ful (pooled in­sur­ance where share­hold­ers con­trib­ute money to pro­tect against loss or dam­age), he said, in­di­cat­ing that nev­er­the­less, fi­nan­cial in­clu­sion also re­quires en­hanc­ing ac­cess to ba­sic bank­ing ser­vices, cre­at­ing a con­ducive reg­u­la­tory en­vi­ron­ment, and pro­mot­ing pub­lic aware­ness on fi­nan­cial mat­ters.

Fi­nan­cial sta­bil­ity

He fur­ther said sec­ond, we will dis­cuss how to strengthen reg­u­la­tion and su­per­vi­sion to fos­ter fi­nan­cial sta­bil­ity, elab­o­rat­ing a re­cent IMF study noted that Is­lamic stan­dard set­ters, in­clud­ing the Is­lamic Fi­nan­cial Ser­vices Board, have es­tab­lished “rules of the road,” but these are not be­ing ap­plied con­sis­tently, po­ten­tially sti­fling the de­vel­op­ment of Is­lamic fi­nance and cre­at­ing sys­temic vul­ner­a­bil­i­ties.

He added that con­tin­ued ef­forts are needed to re­fine reg­u­la­tory frame­works for Is­lamic fi­nance in­sti­tu­tions-in line with re­cent rec­om­men­da­tions of both the Basel Com­mit­tee on Bank­ing Su­per­vi­sion and the Is­lamic Fi­nan­cial Ser­vices Board-while en­sur­ing greater con­sis­tency in their ap­pli­ca­tion.

The gov­er­nor said the third theme will cover the de­vel­op­ment of Sukuk (the Is­lamic equiv­a­lent of bonds) and other long-term Is­lamic fi­nance in­stru­ments for in­fra­struc­ture fi­nanc­ing and sus­tain­able de­vel­op­ment.

Sukuk have the po­ten­tial to serve as high qual­ity liq­uid as­sets, which is of in­creas­ing im­por­tance to reg­u­la­tors in the im­ple­men­ta­tion of Basel III liq­uid­ity and cap­i­tal ad­e­quacy frame­works, he said, not­ing but de­vel­op­ing the Sukuk mar­ket re­quires fur­ther im­prove­ments to le­gal, reg­u­la­tory, and dis­clo­sure norms, and stronger mar­ket in­fra­struc­ture-in­clud­ing de­vel­op­ing the sec­ondary mar­ket.

Asked about the suc­cess fac­tors that have led to the re­cent growth of Is­lamic fi­nance, AlHashel said the key suc­cess fac­tors an­chor­ing the re­cent growth of Is­lamic fi­nance have evolved over time and, to a cer­tain ex­tent, have changed the land­scape of the in­dus­try.

He added there are many main rea­sons for the suc­cess: First, the char­ac­ter­is­tics of Is­lamic fi­nance - such as the con­cept of shar­ing profit and loss, in­vest­ments that are so­cially re­spon­si­ble and en­vi­ron­men­tally sus­tain­able, and link­ing fi­nance with real eco­nomic ac­tiv­i­ties - have grown in pop­u­lar­ity since the global fi­nan­cial cri­sis of 2008, and pro­vide an al­ter­na­tive to more tra­di­tional fi­nan­cial prod­ucts.

Among the rea­sons is the de­mand for shari­a­com­pli­ant fi­nan­cial ser­vices and prod­ucts (re­tail, cor­po­rate), or for build­ing in­fra­struc­ture projects, in both Is­lamic and non-Is­lamic coun­tries, has been on the rise, re­sult­ing in a large num­ber of in­sti­tu­tions en­ter­ing the Is­lamic fi­nance field for the first time, he said, re­fer­ring that some of these in­sti­tu­tions have been con­ven­tional banks ea­ger to cap­ture a share of a promis­ing mar­ket through their Is­lamic win­dow op­er­a­tions.

The third rea­son is the de­vel­op­ment of a broad range of in­no­va­tive prod­ucts and in­stru­ments by Is­lamic fi­nan­cial in­sti­tu­tions, he stated, in­di­cat­ing such in­no­va­tion has pro­vided ad­di­tional ser­vices to clients, but has also brought some added chal­lenges to those in­sti­tu­tions, as well as to their su­per­vi­sors.

He said the fourth is the avail­abil­ity of a con­ducive reg­u­la­tory frame­work and en­abling in­fra­struc­ture has been a key fac­tor in the de­vel­op­ment of Is­lamic fi­nance, adding this fac­tor is preva­lent in many coun­tries where le­gal and reg­u­la­tory amend­ments have been un­der­taken to ac­com­mo­date Is­lamic fi­nance.

Chal­lenges ahead

De­spite these pos­i­tive de­vel­op­ments, Is­lamic fi­nance is still frag­mented and many chal­lenges lie ahead, Hashel said, adding it re­mains to be pro­cesses in the con­text of chang­ing in­dus­try needs and macroe­co­nomic and de­mo­graphic en­vi­ron­ments,” he said.

Asked about the role of IMF with re­spect to Is­lamic fi­nance, he said “the IMF has long been in­volved in Is­lamic fi­nance. It has played a key role in the es­tab­lish­ment of the Is­lamic Fi­nan­cial Ser­vices Board”. The es­tab­lish­ment of an In­ter­de­part­men­tal Work­ing Group for Is­lamic fi­nance also demon­strates the IMF’s recog­ni­tion of the im­por­tance of Is­lamic fi­nance for many of its mem­bers, in­clud­ing the broader fi­nan­cial sta­bil­ity im­pli­ca­tions, he men­tioned.

Crit­i­cal role

“While the IMF has made many con­tri­bu­tions to Is­lamic fi­nance, I be­lieve, that it can en­deavor to play an even more crit­i­cal role for Is­lamic fi­nance in the fol­low­ing ar­eas:

“Pro­vid­ing pol­icy ad­vice and ca­pac­ity build­ing in a broad range of ar­eas. Tech­ni­cal as­sis­tance and train­ing can help coun­tries strengthen the reg­u­la­tion and su­per­vi­sion of their Is­lamic fi­nan­cial in­sti­tu­tions, and de­velop do­mes­tic Sukuk mar­kets. This en­gage­ment could use­fully fo­cus on pro­vid­ing a set of key reg­u­la­tory prac­tices, in ar­eas such as liq­uid­ity and Shari’ah gov­er­nance, with a view to achiev­ing fur­ther con­ver­gence.

“Pro­mot­ing fur­ther in­te­gra­tion of Is­lamic fi­nance with in­ter­na­tional fi­nan­cial stan­dards to fos­ter fi­nan­cial sta­bil­ity and im­prove pru­den­tial reg­u­la­tions across ju­ris­dic­tions, in­clud­ing in the con­text of the IMF’s an­nual eco­nomic con­sul­ta­tions and Fi­nan­cial Sec­tor Assess­ment Pro­grams (FSAPs). In this re­spect, the IMF might wish to take into ac­count the im­pli­ca­tions of Is­lamic fi­nance for those mem­bers where Is­lamic fi­nance is grow­ing in sig­nif­i­cance.

“Fa­cil­i­tat­ing the as­sess­ment of the reg­u­la­tion and su­per­vi­sion of the Is­lamic bank­ing sec­tor us­ing the Is­lamic Fi­nan­cial Ser­vices Board Core Prin­ci­ples for Is­lamic Fi­nance Reg­u­la­tion. Th­ese prin­ci­ples are aimed at pro­vid­ing a frame­work for the as­sess­ment of the qual­ity of the reg­u­la­tory and su­per­vi­sory frame­work for the Is­lamic bank­ing in­dus­try,” he said.

As for Is­lamic fi­nance in Kuwait, Hashel said Kuwait has a bank-cen­tric fi­nan­cial sys­tem, with the bank­ing sec­tor ac­count­ing for about 84 per­cent of the do­mes­tic fi­nan­cial sec­tor. The Cen­tral Bank of Kuwait has also played a vi­tal role in the es­tab­lish­ment of the Is­lamic Fi­nan­cial Ser­vices Board (IFSB) and the In­ter­na­tional Is­lamic Liq­uid­ity Man­age­ment Cor­po­ra­tion (IILM)- as it was a found­ing mem­ber of both in­sti­tu­tions, he ex­plained.

Fur­ther, the Cen­tral Bank con­tin­ues to play an ac­tive role through its mem­ber­ship in the board of di­rec­tors and par­tic­i­pa­tion in work­ing groups and tech­ni­cal com­mit­tees us­ing its ex­ten­sive ex­pe­ri­ence to con­trib­ute to the de­vel­op­ment of Is­lamic mar­kets and reg­u­la­tory frame­works, he said.

He said the growth in mar­ket de­mand for Is­lamic fi­nance has been ac­com­mo­dated by es­tab­lish­ing ap­pro­pri­ate reg­u­la­tory poli­cies, not­ing in 2003, the Cen­tral Bank of Kuwait pro­moted a leg­isla­tive frame­work by adding a spe­cial sec­tion to ex­ist­ing Law No. 32 of 1968, to es­tab­lish pru­dent reg­u­la­tory and su­per­vi­sory poli­cies and pro­ce­dures for Is­lamic fi­nance.

This re­flects “our view that Is­lamic banks, while be­ing unique in their struc­ture, re­main an in­te­gral part of the fi­nan­cial in­dus­try, and that their ser­vices need to be reg­u­lated un­der one su­per­vi­sory um­brella”, he made clear.

The leg­is­la­tion has al­lowed “our Bank to for­mally de­velop pru­den­tial reg­u­la­tions for Is­lamic banks that are con­sis­tent with, and drawn from, the work of the Basel Com­mit­tee on Bank­ing Su­per­vi­sion and the Is­lamic Fi­nan­cial Ser­vices Board, he said. Do­ing so has es­tab­lished a level play­ing field for Is­lamic and con­ven­tional banks, while fa­cil­i­tat­ing the de­vel­op­ment of more Is­lamic banks on a co­her­ent and sus­tain­able ba­sis, he con­cluded.

Gover­nor of Cen­tral Bank of Kuwait (CBK) Mo­ham­mad Yousef Al-Hashel

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