IFC could help in growth of Islamic finance industry – Event can provide forum for global dialogue to boost the sector

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Mohammad Yousef Al-Hashel, CBK Governor
Mohammad Yousef Al-Hashel, CBK Governor

KUWAIT CITY, Nov 10, (KUNA): Governor of Central Bank of Kuwait (CBK) Mohammad Yousef Al-Hashel has said the Islamic Finance Conference (IFC) to be hosted by Kuwait tomorrow can provide a forum for global forum to develop a vision for the sustained growth of the Islamic financial industry.

The conference will build a platform for continued work in order to further cultivate and exploit the core competencies of Islamic Finance that make sustainable growth possible, he said in an interview with the International Monetary Fund (IMF) published on its website Tuesday.

Although still a comparatively small share of all global financial assets, the role and relevance of Islamic finance in the global financial system is gaining significance, he added.

He noted that the first theme concerns increasing financial inclusion through access to finance, which is vital in stimulating the economy and improving the welfare of the underprivileged, adding research suggests that over one third of the world’s adult population — about 2.5 billion people — lacks access to formal financial services.

Islamic finance can help remedy this situation by promoting Islamic microfinance, financing to small and medium-sized enterprises, and micro Takaful (pooled insurance where shareholders contribute money to protect against loss or damage), he said, indicating that nevertheless, financial inclusion also requires enhancing access to basic banking services, creating a conducive regulatory environment, and promoting public awareness on financial matters.

He further said second, we will discuss how to strengthen regulation and supervision to foster financial stability, elaborating a recent IMF study noted that Islamic standard setters, including the Islamic Financial Services Board, have established “rules of the road,” but these are not being applied consistently, potentially stifling the development of Islamic finance and creating systemic vulnerabilities.

He added continued efforts are needed to refine regulatory frameworks for Islamic finance institutions — in line with recent recommendations of both the Basel Committee on Banking Supervision and the Islamic Financial Services Board — while ensuring greater consistency in their application.

The governor said the third theme will cover the development of Sukuk (the Islamic equivalent of bonds) and other long-term Islamic finance instruments for infrastructure financing and sustainable development.

Sukuk have the potential to serve as high quality liquid assets, which is of increasing importance to regulators in the implementation of Basel III liquidity and capital adequacy frameworks, he said, noting but developing the Sukuk market requires further improvements to legal, regulatory, and disclosure norms, and stronger market infrastructure-including developing the secondary market.

Asked about the success factors that have led to the recent growth of Islamic finance, Al-Hashel said the key success factors anchoring the recent growth of Islamic finance have evolved over time and, to a certain extent, have changed the landscape of the industry.

He added there are many main reasons for the success: First, the characteristics of Islamic finance – such as the concept of sharing profit and loss, investments that are socially responsible and environmentally sustainable, and linking finance with real economic activities – have grown in popularity since the global financial crisis of 2008, and provide an alternative to more traditional financial products.

Among the reasons is the demand for Shari’ah-compliant financial services and products (retail, corporate), or for building infrastructure projects, in both Islamic and non-Islamic countries, has been on the rise, resulting in a large number of institutions entering the Islamic finance field for the first time, he said, referring that some of these institutions have been conventional banks eager to capture a share of a promising market through their Islamic window operations.

The third reason is the development of a broad range of innovative products and instruments by Islamic financial institutions, he stated, indicating such innovation has provided additional services to clients, but has also brought some added challenges to those institutions, as well as to their supervisors.

He said the fourth is the availability of a conducive regulatory framework and enabling infrastructure has been a key factor in the development of Islamic finance, adding this factor is prevalent in many countries where legal and regulatory amendments have been undertaken to accommodate Islamic finance.

Despite these positive developments, Islamic finance is still fragmented and many challenges lie ahead, Al-Hashel said, adding it remains to be seen whether the past successes can be sustained, particularly in light of the recent decline in oil prices.

Continued innovation and the collective effort of all stakeholders will be required to ensure sustainable growth and success going forward, he said.

Concerning key challenges facing Islamic finance, Al-Hashel said there are two interrelated challenges: one related to market development; and the other, establishing robust supervisory and regulatory frameworks.

With regards to market development, despite the notable strides that have been made, market penetration remains low – with Islamic financial assets accounting for only 1 percent of global financial assets, he explained.

Further, the structure of the Islamic finance industry is still very bank-centric and concentrated in a few countries, he noted.

“In addition, we face two types of regulatory and supervisory challenges. The first relates to the foundation of Islamic finance, including ensuring an enabling supervisory, regulatory and legal environment; a suitable accounting and auditing framework; supportive financial market infrastructure; and, capacity building. Addressing these is a pre-requisite for the successful development of Islamic finance,” he said.

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