The dynamics of the global financial sector are creating a new opportunity for accelerated growth in Islamic finance and recommended industry-wide initiatives to encourage this, said Emirati Minister of State for Finance and Industry, Mohammed Khalfan Bin Kharbash.
Speaking at the International Islamic Finance Forum held at the Crown Plaza, Dubai, Kharbash noted that global drives for greater transparency, enhanced shareholder protection and superior returns are serving to position Islamic finance as a very viable investment solution.
“Islamic finance – by its essence and fundamentals – is inherently about sound and efficient finance,” said the Minister noting that the preference for asset-based financing and risk-sharing mechanisms creates built-in safety guards that protect both institutions and investors. “Aversion to interest and speculation are essentially prudential regulations that encourage greater collateralization, marking to market and risk sharing,” he said.
The Minister also pointed out that the preference for tying debt to the value of the asset offers invaluable protection against the dangerous debt cycles often seen in conventional finance. “In a world seeking greater transparency the underlying principles of Islamic finance offer a refreshing reminder of how stakeholders can be better protected and how investment can be more ethically grounded,” he said.
Dr Kharbash noted that post September 11, the collapse of Enron and the latest series of rulings in the US that have made investment banks increasingly liable for corporate scandals, financial institutions worldwide are being forced to reassess their mode of operations and accountability.
“Slowly we are learning that highly engineered finance is not necessarily sound finance,” he said. At the same time, he noted, investors are becoming increasingly discerning and looking for non-correlated instruments and superior returns which creates a golden opportunity for Islamic finance.
However, he pointed out that capitalizing on the new investment climate would depend on the ability of the Islamic finance industry to learn from the mistakes of the conventional market particularly in light of the increased scrutiny of Islamic finance institutions.
“Islamic financiers must be aware of the dangers of creative accounting, creative structuring and of over-engineering contracts for the sake of raising margins rather than efficiency gains,” warned the Minister. “Innovation must be a genuine response to investor needs that reaches Sharia compliance and not simply unnecessary layering of products. If the Islamic finance industry is to embrace the new mind-set that has hit the global investment community, it must embrace the underlying investor needs that created it.”
A collective approach to meeting this challenge argued the Minister will be the most effective way of ensuring that efforts to promote rapid growth are industry wide and institutionalized. He praised regional efforts aimed at introducing common training, ratings and accounting standards. “We have a huge amount of expertise within this industry,” said the Minister, “but there is a lack of collective action aimed at developing new products and new distribution mechanisms.”
Dr Kharbash concluded his remarks by reiterating “Islamic finance is essentially and fundamentally about sound finance and can clearly respond to the heightened need for transparency from the more discerning investor.” Global finance, he said, is no longer dictated by returns alone but also by sound governance and a community wide commitment to improving the financial security of all its members. “Never before has the industry witnessed such an ideal opportunity to prove its value added and provide a healthy investment code that not only generates solid returns for investors but also for society as a whole,” he said. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
