Is­lamic fi­nance pro­vides sys­tem to boost growth: Al-Hashel

Kuwait Times - - LOCAL -

KUWAIT: Gov­er­nor of the Cen­tral Bank of Kuwait (CBK) Dr Mo­ham­mad Al-Hashel said yes­ter­day that the Is­lamic fi­nance can play a role in fi­nan­cial sys­tem based on prin­ci­ples that cre­ate jobs, drive growth, re­duce poverty and achieve equal­ity.

This came in Hashel’s speech at the open­ing of The Global Is­lamic Fi­nance Con­fer­ence, hosted by the State of Kuwait yes­ter­day un­der the pa­tron­age of His High­ness the Amir Sheikh Sabah Al-Ah­mad Al-Jaber Al-Sabah, and with the pres­ence of Act­ing Prime Min­is­ter and For­eign Min­is­ter Sheikh Sabah Al-Khaled Al-Ha­mad Al-Sabah, Deputy Prime Min­is­ter and Min­is­ter of Fi­nance Anas AlSaleh and Di­rec­tor Gen­eral of In­ter­na­tional Mon­e­tary Fund (IMF) Christine Lagarde.

The Is­lamic fi­nance also con­trib­utes to di­rect­ing the credit to pro­duc­tive in­vest­ments as well as in­vest­ment pro­mo­tion, he added. He pointed out that the con­fer­ence, which wit­nessed the first time the In­ter­na­tional Mon­e­tary Fund’s par­tic­i­pa­tion, tack­les Is­lamic fi­nanc­ing and means of de­vel­op­ing the sec­tor.

Es­sen­tial changes

Es­tab­lish­ing a fi­nance sys­tem based on Is­lamic Sharia re­quires es­sen­tial changes not only in the fi­nan­cial sec­tor but also in the way so­ci­eties are work­ing, thus build­ing in­sti­tu­tional ca­pa­bil­i­ties is of prior im­por­tance, Hashel said.

Kuwait wit­nessed the es­tab­lish­ment of Kuwait Fi­nance House (KFH) - not only the first Is­lamic bank in Kuwait - but also one of the very first es­tab­lished any­where in the world, Hashel told the con­fer­ence. It was a hum­ble start; with only four employees, KFH opened its doors to the pub­lic for the first time on 31 Au­gust 1978.

“I doubt any­one imag­ined that it would one day be­come a lead­ing Is­lamic bank, with 8,000 employees and oper­a­tions span­ning across seven re­gions of the world,” he said. Ac­cord­ing to the CBK Gov­er­nor, the growth of Is­lamic fi­nance as an in­dus­try is equally im­pres­sive. “This is how­ever hardly sur­pris­ing, as the ba­sic prin­ci­ples of Is­lamic fi­nance de­servedly have a univer­sal ap­peal, ir­re­spec­tive of re­li­gious be­liefs,” he said.

He noted that the golden rule of Is­lamic fi­nance epit­o­mizes the con­cept of jus­tice which is “cen­tral to Is­lamic fi­nance. Jus­tice, in eco­nomic con­text, re­quires at least two things; proper al­lo­ca­tion of re­sources for the wel­fare of the en­tire so­ci­ety, and shar­ing of risk and re­ward.”

This is the ‘golden rule’ of a good so­ci­ety, a prin­ci­ple that has been con­veyed by al­most ev­ery ma­jor re­li­gion and eth­i­cal tra­di­tion. It re­quires that any­thing that harms a so­ci­ety is pro­hib­ited, even if it is ben­e­fi­cial for the in­di­vid­ual.

Since banks mo­bi­lize sav­ings from a large group of peo­ple and lend to rel­a­tively fewer bor­row­ers, there is an el­e­ment of asym­me­try in banks’ re­source mo­bi­liza­tion on the one hand, and re­source al­lo­ca­tion on the other, he said.

This ne­ces­si­tates that banks, in the world of Is­lamic fi­nance, lend to those who can use th­ese sav­ings to ben­e­fit the whole of so­ci­ety - by making pro­duc­tive in­vest­ments and cre­at­ing more jobs. “How­ever, in re­cent years, ex­ces­sive liq­uid­ity amid un­con­ven­tional mon­e­tary poli­cies has mostly fu­eled as­set growth, with lim­ited im­pact on real eco­nomic ac­tiv­ity.”

In­sep­a­ra­ble link

Hashel said: “Is­lamic fi­nance, by es­tab­lish­ing an in­sep­a­ra­ble link be­tween fi­nance and the real econ­omy, en­cour­ages eco­nomic risk tak­ing that helps im­prove growth and cre­ate jobs. It re­quires that credit must be pro­vided for pro­duc­tive in­vest­ments, not for con­spic­u­ous consumption or spec­u­la­tive ac­tiv­i­ties.” He pointed to three types of in­vest­ment: First, cur­rency based in­vest­ments, which he con­sid­ered ‘the most dan­ger­ous though in­vestors mostly con­sid­ered them safe’.

The sec­ond is ‘in­vest­ments in as­sets like gold that never pro­duced any­thing’, while “the third type is ‘in­vest­ments in pro­duc­tive as­sets, whether busi­nesses, farms or real es­tate’ - and this is pre­cisely what Is­lamic fi­nance also re­quires banks to do - to pro­mote in­vest­ments in pro­duc­tive as­sets so that the en­tire so­ci­ety can ben­e­fit.”

More im­por­tantly, Is­lamic fi­nance goes a step fur­ther, as it also re­quires the shar­ing of prof­its and losses. That is not only im­por­tant from the jus­tice stand­point but also to en­sure fi­nan­cial sta­bil­ity, he stressed.

Since the es­tab­lish­ment of the first Is­lamic bank in Kuwait around four decades ago, “we now have five do­mes­tic Is­lamic banks that col­lec­tively ac­count for 39% of do­mes­tic bank­ing as­sets,” he said. This is the third high­est share of Is­lamic banks op­er­at­ing in any coun­try with a dual bank­ing sys­tem - where con­ven­tional and Is­lamic banks op­er­ate in par­al­lel.

Glob­ally, Kuwait has the fifth largest share of Is­lamic bank­ing as­sets and the third largest share of Is­lamic funds. And it is not only in Kuwait that the Is­lamic fi­nance in­dus­try has taken off in re­cent decades.

Ac­cord­ing to Hashel, es­ti­mates sug­gest that the “global mar­ket for Is­lamic fi­nan­cial ser­vices, as mea­sured by Sharia com­pli­ant as­sets, has crossed $2 tril­lion by now, a quan­tum leap from $150 bil­lion in the mid-1990’s.”

Last year, the sukuk mar­ket wit­nessed de­but is­suances from the gov­ern­ments of four non-OIC (Or­ga­ni­za­tion of Is­lamic Co­op­er­a­tion) coun­tries-the UK, Hong Kong, Lux­em­bourg, and South Africa which in­di­cates the grow­ing pop­u­lar­ity of sukuk be­yond the Mus­lim world.

As th­ese trends high­light that Is­lamic fi­nance is nei­ther a nov­elty nor is it re­stricted to Mus­lim coun­tries only. Over the past decade, the in­dus­try has trans­formed it­self from be­ing a niche mar­ket to a vi­able al­ter­na­tive for con­sumers of con­ven­tional fi­nance, ir­re­spec­tive of their re­li­gious be­liefs.

To­day Is­lamic banks serve mil­lions of cus­tomers across the Mid­dle East, South­East Asia and be­yond, offering a va­ri­ety of Sharia-com­pli­ant prod­ucts and ser­vices. While it is in­deed a re­mark­able achieve­ment, Is­lamic fi­nance has sig­nif­i­cant po­ten­tial for fur­ther growth, the CBK Gov­er­nor said.

Three ar­eas

In this re­gard, he points out three such ar­eas: First, both within Asia and the Mid­dle East and North Africa (MENA), the re­gions where Is­lamic fi­nance has a greater foot­print, there is sub­stan­tial scope for in­vest­ments in in­fra­struc­ture. Th­ese in­vest­ments are in­vari­ably backed by tan­gi­ble real as­sets and thus ideal can­di­dates for Is­lamic fi­nance.

Sec­ond, the world is in­creas­ingly rec­og­niz­ing the im­por­tance of in­vest­ments that are so­cially re­spon­si­ble and en­vi­ron­men­tally sus­tain­able. And given the sim­i­lar­ity in their busi­ness philoso­phies, Is­lamic fi­nance can be a nat­u­ral choice for so­cially re­spon­si­ble in­vest­ments, the CBK Gov­er­nor told the IMF-CBK con­fer­ence.

Third, in many de­vel­op­ing coun­tries a ma­jor­ity of the pub­lic still re­mains hugely un­der­served by a for­mal fi­nan­cial sys­tem, if not en­tirely un­banked. For in­stance, World Bank data on fi­nan­cial in­clu­sion for 2015 re­veals that only 45.5 per­cent of the adult pop­u­la­tion has a bank ac­count in South Asia, and merely 14 per­cent in the MENA re­gion - in­ci­den­tally, th­ese two re­gions are home to more than 1.3 bil­lion Mus­lims, around 82 per­cent of en­tire Mus­lim pop­u­la­tion.

Th­ese num­bers col­lec­tively high­light that Is­lamic banks have the po­ten­tial to reach mil­lions of un-served cus­tomers. A bank­ing model in­spired by the phi­los­o­phy of so­cial jus­tice can ill-af­ford to ig­nore its re­spon­si­bil­ity in serv­ing the mil­lions which are oth­er­wise pos­si­bly at the mercy of ex­ploita­tive, in­for­mal money lenders, he said.

Hashel then turned to the fu­ture of Is­lamic fi­nance. Pre­dic­tion is more dif­fi­cult, if it is about the fu­ture of fi­nance, he said. “So, in­stead of at­tempt­ing to pre­dict the fu­ture, I would like to dis­cuss what needs to be done to help the Is­lamic fi­nance in­dus­try reach its po­ten­tial. In this re­gard, the role of four types of in­sti­tu­tions is crit­i­cal not only in pro­vid­ing an en­abling en­vi­ron­ment for a sus­tain­able and re­silient in­dus­try, but also in bring­ing cur­rent prac­tices closer to the true spirit of Is­lamic fi­nance,” he said.

The Mus­lim so­ci­eties were once rec­og­nized for their con­tri­bu­tion to var­i­ous aca­demic dis­ci­plines, rang­ing from alchemy to as­tron­omy and math­e­mat­ics to medicine. How­ever, at present “the schol­arly work be­ing pro­duced in our so­ci­eties is more of an in­di­vid­ual ef­fort than any­thing at the in­sti­tu­tional level.”

Due to this lack of ca­pac­ity build­ing at the in­sti­tu­tional level, ef­forts of oth­er­wise ded­i­cated in­di­vid­u­als have re­mained di­ver­gent and frag­mented. Many with pro­found knowl­edge of Is­lamic ju­rispru­dence know lit­tle about mod­ern fi­nance.

Top ten schol­ars

Hashel re­ferred to a study re­veal­ing that the top ten schol­ars in Is­lamic fi­nance ac­count for 67 per­cent of all chair­man po­si­tions of Sharia boards. No won­der then that Is­lamic banks strug­gle to find can­di­dates for their Sharia boards who can suit­ably guide them in offering in­no­va­tive prod­ucts.

He re­ferred to ef­fec­tive reg­u­la­tion of Is­lamic fi­nance which is a “daunt­ing task, par­tic­u­larly in a dual bank­ing sys­tem.” Ad­di­tion­ally, the pe­cu­liar na­ture of Is­lamic fi­nance poses its own chal­lenges in terms of de­sign­ing a ro­bust reg­u­la­tory regime.

“Take the case of Basel III re­forms for ex­am­ple, where de­tailed guidance has been pro­vided by the Basel Com­mit­tee for Bank­ing Su­per­vi­sion (BCBS) for the im­ple­men­ta­tion in a con­ven­tional set­ting. How­ever, for Is­lamic fi­nan­cial in­sti­tu­tions, lim­ited rel­e­vant guidance is avail­able, if at all,” he said.

This un­doubt­edly re­quires the use of dis­cre­tion by re­spec­tive reg­u­la­tors. But the greater use of dis­cre­tion is bound to cre­ate dif­fer­ences across coun­tries and may in­crease the risk of reg­u­la­tory ar­bi­trage, yet im­por­tantly such re­forms were meant to foster a high level of con­ver­gence among reg­u­la­tory regimes. The CBK Gov­er­nor noted that high re­spon­si­bil­ity falls on Is­lamic fi­nan­cial in­sti­tu­tions to make ef­forts in offering prod­ucts and ser­vices that re­flect the spirit of Is­lamic fi­nance and are not just merely com­pli­ant with Sharia re­quire­ments.

“This re­quires build­ing ca­pac­ity to do bet­ter re­search and of­fer in­no­va­tive ser­vices. More­over, Is­lamic fi­nan­cial in­sti­tu­tions need to op­er­ate with the aim of pro­mot­ing so­cial jus­tice in their al­lo­ca­tion of re­sources,” he said.

Given th­ese chal­lenges, it is not pos­si­ble for any one of th­ese four types of in­sti­tu­tions to make a mean­ing­ful dif­fer­ence on its own. Each institution, from aca­demic to reg­u­la­tory and le­gal to fi­nan­cial, has a dis­tinct yet mu­tu­ally re­in­forc­ing role to play.

While in­di­vid­u­ally in­suf­fi­cient, col­lec­tively th­ese in­sti­tu­tions pro­vide the very foun­da­tion for a dy­namic and re­silient Is­lamic fi­nance in­dus­try and are thus the pre-req­ui­sites for its sus­tain­able growth.

In con­clu­sion, the CBK Gov­er­nor noted that cur­rent eco­nomic and fi­nan­cial trends are a con­stant re­minder that the world needs a bet­ter sys­tem. “The in­her­ent fragility of mod­ern fi­nance is quite ev­i­dent. And in re­cent years, the un­fold­ing of events like ma­nip­u­lat­ing cur­ren­cies, rig­ging LI­BOR and miss-sell­ing mort­gages has in­ten­si­fied the de­bate about the role of in­cen­tive struc­tures and ethics,” he said. —KUNA

KUWAIT: (From left) Act­ing Prime Min­is­ter and For­eign Min­is­ter Sheikh Sabah Al-Khaled Al-Sabah, Di­rec­tor Gen­eral of the In­ter­na­tional Mon­e­tary Fund Christine Lagarde and Gov­er­nor of the Cen­tral Bank of Kuwait Dr Mo­ham­mad Al-Hashel at­tend the Global Is­lamic Fi­nance Con­fer­ence yes­ter­day. — Photo by Yasser Al-Zayyat

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