World Bank Optimistic About Future Growth Opportunities in Global Islamic Finance Industry (By MIFC)

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Last Updated : 05 Oct 2012


The boom in world commodities such as oil and gas; quality improvements in the industry; the growth of Islamic finance windows at conventional financial institutions and the growth of Shariah-compliant equity, sukuk and other indices, all point to exciting opportunities for the Islamic finance industry going forward.


Mahmoud Mohieldin, Managing Director of the World Bank, was optimistic about the huge potential for growth of the global Islamic finance industry, albeit with some important caveats, in his Public Lecture titled ‘Enhancing the Islamic Financial System in a Decade of Increasing Internationalisation’ delivered at the Plenary Session of the Global Islamic Finance Forum (GIFF) 2012.


According to figures presented by Mr Mohieldin, Islamic banking assets and deposits grew faster than conventional banking assets and deposits in seven key markets - Malaysia, Indonesia, Turkey, Saudi Arabia, UAE and Qatar – in the period 2006-10. Turkey, Qatar and Malaysia showing the largest growth differentials.


The rationale underpinning the growth expectations include the huge surpluses generated by the commodity boom in several Muslim countries, which stressed Mr Mohieldin, need to be allocated through financial intermediaries and sovereign wealth funds.


Similarly, according to the World Bank, Islamic finance is increasingly being seen to offer practical alternatives to conventional instruments for savers and investors; product innovation, better regulatory oversight has meant that quality has improved substantially over the years.


Over the past three years too, ten major international conventional financial institutions have opened Islamic finance windows, which according to Mr Mohieldin “translates into Islamic finance products potentially being available in an additional 44,000 outlets/branches across more than 70 countries.”


However, Mr Mohieldin also informed delegates that Islamic finance, despite its impressive growth, still constitutes a very small proportion of the global financial system and is faced with several key challenges, which he identified as improving regulatory oversight; rebalancing tax treatment; strengthening insolvency frameworks; promoting standardization; ensuring adequate liquidity for long-term financing; and establishing sound risk-management practices.


On improving regulatory oversight, for instance, Mr Mohieldin advised that progress needs to be made on improving regulatory framework and strengthening regulations in several markets and that “consensus remains to be established on a widely-accepted and comprehensive risk based supervisory approach, essential for mitigating the risk of systemic failures.”


Similarly, more work is needed on ensuring convergence between best insolvency practices on the conventional and Shariah-compliant sides, especially the need for developing reliable mechanisms for dealing with sukuk defaults and identifying parties’ rights especially in the case of cross-border transactions.


“Lack of standardisation and cohesion, especially in sukuk products, hinders the growth potential of Islamic finance. Innovation and knowledge-sharing between the various market players are essential to facilitate the standardisation and unification of global markets for Islamic financial products,” he emphasised.


The World Bank, he advised, is contributing to the development of Islamic finance by joining other multilateral development banks (MDBs) in tapping Islamic financial markets; working with industry bodies to develop insolvency and corporate governance frameworks for the industry; and partaking in knowledge sharing and capacity building with various industry stakeholders.


Indeed, the World Bank is collaborating with the Islamic Financial Services Board (IFSB) in Kuala Lumpur to establish widely-accepted Principles for Effective Insolvency and Creditor Rights System. It is also in the process of finalising the Supplement Corporate Governance Guidelines for Islamic Financial Institutions, and is in discussions with the International Islamic Liquidity Management Corporation (IILM) to foster liquidity in the global Islamic financial system.


“Within a relevant framework of regulations, standards and corporate governance,” he concluded, “Islamic finance, based on its main principles and through continued investment in human capital can play an ever-more important role in ensuring broadened financial access to support sustainable development”.


In fact, some of the sentiments of the World Bank were echoed at a high-level roundtable themed “Disclosure Requirements for Islamic Capital Market Products” which was organised by the IFSB and the International Organisation of Securities Commissions (IOSCO), in collaboration with the Securities Commission Malaysia (SC), as part of GIFF 2012.


“As the Islamic capital market expands and becomes more global, it is increasingly important that issues surrounding investor protection and market integrity are addressed from a cross-jurisdictional perspective. It is therefore critical for regulators and standard-setters to further examine disclosure regimes for Islamic capital market products, with a view to allowing more informed investment decision-making and to promote the further growth of the Islamic capital market,” said Ranjit Ajit Singh, Chairman of SC, who is also the International Organisation of Securities Commissions (IOSCO) Board Member and the Vice-Chair of the IOSCO Emerging Markets Committee.

Jaseem Ahmed, Secretary General of IFSB, emphasised that promoting cross-border financing and investment through Islamic finance is critical to attaining the depth and scale in Islamic capital markets needed to be competitive. “This will require the adoption of robust regulatory and disclosure practices that give confidence to investors and consumers alike. IFSB hopes that this collaboration with IOSCO will facilitate a process leading to a set of practices that could be harmonised or mutually agreed upon,” he added.

At the same time, David Wright, Secretary General of IOSCO acknowledged that “the recent financial crises highlighted the importance of sound disclosure regimes in mitigating systemic risk and building confidence in the financial markets. Given the tremendous growth of the Islamic finance industry - an increasingly important segment of the global financial markets – it is essential to achieve greater harmonisation in disclosure requirements across jurisdictions where Islamic capital market products are offered.”