GLOBAL: Islamic finance
is gaining mainstream acceptance and its phenomenal rise in the
international arena is significantly attributed to its unique proposition
of risk-sharing. Yet it seems that reality paints a different picture from
expectations as the IFSB notes that the line between risk-free and
risk-bearing instruments are blurring, with risk-sharing products taking a
back seat.
“The analysis of developments in Islamic banking and Sukuk markets revealed
some trends that are at odds with the view that risk-sharing should be a
distinctive feature of Islamic finance,” wrote the IFSB in its latest
Islamic Financial Services Industry Stability Report.
According to the standard-setting body, the share of risk-sharing and
loss-bearing profit-sharing investment accounts (PSIA) has dropped below
50% and there is a creeping movement of PSIA being replaced by deposits
with capital guarantees and predetermined returns. This fading element of
risk-sharing is also emerging in the Sukuk market evident by the persistent
decline of Mudarabah and Musharakah structures (which accounted for less
than 10% of new issuances in 2014), suggesting that conventional bond-like
structures were adopted leaving issuers to assume the bulk of the risks
involved instead of sharing it with investors.
To reverse this pattern, an effective regulatory architecture is necessary.
Malaysia in 2013 took the bold step of implementing the Islamic Financial
Services Act 2013 (IFSA 2013), which clearly distinguishes between
capital-guaranteed deposits and risk-bearing investment accounts. However,
according to the IFSB, many countries still face the issue of identifying
principles and measures to assess gaps in existing structures, with
regulatory arbitrage potentially being a concern in light of the rising
competition between Shariah compliant finance and its conventional peer.
“The competition for customers may induce a further approximation of
Islamic products to the commercial features of conventional products,” said
the IFSB which further expounded that this poses a challenge to a
regulatory system that has modified their infrastructure to accommodate
Islamic banks.
To this end, the IFSB introduced The Core Principles for Islamic Finance
Regulation which seeks to provide the fundamentals for a coherent
regulatory system addressing the unique characteristics of Shariah
compliant finance. “It becomes increasing[ly] important to verify that
these specificities are not only conceptual, but do materialize in the
actual practice of Islamic banks,” it said.
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The limit to growth in Islamic banking
We have all heard of the limits of growth in our economy, environment and
society. There is a limit to growth in everything. Trees, for example, do
not grow forever, otherwise they would be reaching to the outer levels of
the atmosphere. We also live on a planet with finite resources, such as
water, gold, oil and farmland. What about in business and in the economy? A
business cannot grow forever either, otherwise companies like Brother would
be making more and more typewriters every year and Polaroid would be making
more and more instant film every year, which in both cases they are not.
They hit the wall of obsolescence. Products, companies and economies reach
a limit as to how much they can grow. So why should we expect Islamic
banking to be any different?
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