Islamic finance must strengthen regulation, boost its professional staff and diversify as it takes on a bigger global role in the aftermath of the worldwide financial crisis, experts said.
Financial products compliant with Islamic Shariah law are likely to gain in popularity as investors seek safer havens after the ruin caused by toxic derivatives sold globally by mainstream Western banks, they said.
However, experts warn that Islamic financial institutions must be on their guard against falling into the same unbridled excesses that jolted Wall Street and snowballed into a global economic downturn.
“Islamic finance is not immune from such pitfalls. Hence we must be careful to avoid this error in the Islamic financial industry,” said Muhammad Sulaiman Al-Jasser, governor of the Saudi Arabian Monetary Agency.
“Islamic financial institutions are continuing to invest time and effort to improve corporate governance and risk management and I expect that they will continue to avoid mistakes made in designing over-complicated securities,” he said.
He and other experts were speaking at a recent meeting of the Islamic Financial Services Board held in Singapore, which is aiming to be a key player in Islamic finance.
Islamic banking has been left relatively unscathed by the global financial crisis, largely because of rules forbidding engagement in the kind of risky business that sank mainstream institutions like Lehman Brothers.
Islamic Shariah law bars the payment and collection of interest, which is seen as a form of gambling.
Islamic finance also operates on the principle of risk-sharing between the issuing bank and the buyer of a financial product, making it a less risky alternative to some conventional banking instruments.
Al-Jasser and other speakers told the Singapore conference that Islamic finance was likely to gather momentum in the aftermath of the downturn.
“It is my belief that Islamic finance has moved on to a new stage in the last few years. In the past, it was an individual decision based on faith, now it is competing on its own very strong merits in the global marketplace,” he said.
Islamic finance is now established in 47 countries with more than 600 institutions managing “balance-sheet assets” worth over US$630 billion, with another US$200 billion to US$300 billion managed as investment funds, he said.
Heng Swee Keat (王瑞傑), managing director of the Monetary Authority of Singapore, said more Asian countries were using Islamic finance to fund infrastructure projects.
Issuance of Islamic bonds, called sukuk, in Asian currencies totaled US$64.3 billion last year, down 1.5 percent from 2007 when it expanded by 50 percent over the year before, Moody’s Investor Service said this month.
But the industry has much room for growth as Islamic finance represents only 1 percent of the total assets held by the global financial markets, experts said.
Ahmad Mohamed Ali, president of the Islamic Development Bank, urged the industry to offer a wider range of financial services, noting that commercial banking accounts for more than 70 percent of Shariah-compliant assets.
“There is a need for major investment banks that provide a different model of investment banking, a model that is able to have positive impact on economic growth without compromising stability and resilience,” he told the meeting.