Industry is too bank-centric, says Central Bank of Kuwait governor (By IFN)

Industry is too bank-centric, says Central Bank of Kuwait governor

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GLOBAL: The Central Bank of Kuwait governor, Dr Mohammad Al-Hashel today has called for greater symbiosis between the Islamic banking sector with real economic activity, through greater adherence between the principles of Islamic banking and finance and its current practice. Speaking at the World Islamic Banking Conference in Singapore, the governor shared his concerns with regards to the industry; which included liquidity management, weak risk management, as well as greater diversification within the industry to move its focus away from banking. Mohammad said: “It is somewhat counterintuitive that the assets within the Islamic finance industry are still heavily concentrated in banks; which accounts for around 83% of the industry assets, followed by Sukuk at 12%, and the remainder falling under Islamic funds and Takaful.” He added that the structure of the industry is still bank-centric, with disproportionate concentration in a handful of areas and projects. “While this is not dissimilar to the overall banking and finance in the GCC and Malaysia where Islamic finance have a stronger presence, the underdevelopment of the Islamic debt markets and derivative markets makes risk management a difficult task,” he said. In terms of liquidity management, Mohammad believes that the industry is still sorely lacking in terms of the adequate supply of rated and tradable short-term Shariah compliant instruments. He elucidated: “Most of the available short-term instruments are unrated, non-tradable, or traded on a limited basis. Central banks’ short-term Sukuk which could be the closest alternative, are not regularly issued in international currencies. With the lack of depth and breadth in secondary markets and limited opportunities for diversification, an effective portfolio management strategy is hard to implement.” Recognizing these issues, he said, the Central Bank of Kuwait, along with 10 central banks and multilateral bodies have played a leading role in establishing the International Islamic Liquidity Management Corporation. He hopes that the corporation’s debut issuance will help to mitigate the problem of cross-border liquidity management in the future. Mohammad also added that the disparity between theory and practice has also created a lack of trust amongst potential Islamic banking customers; making them sceptical of Islamic banking and finance products. He said: “Equity and partnership-based instruments like Musharakah and Mudarabah is insignificant, which stands in sharp contrast with the true essence of Islamic banking.”