Islamic finance needs better regulation: survey

Islamic finance needs to be better regulated to enhance its ability in identifying risks and restoring its reputation after a series of turbulences within the GCC industries, Global accountancy network Deloitte & Touche revealed in a new survey.

A “sizeable” number of Shariah compliant financial institutions don’t follow globally accepted standards, the Bahrain based Deloitte Islamic Finance Knowledge Center reported on Saturday after surveying more than 40 Islamic institutions and officials in the Middle East.

Deloitte’s report revealed that “The survey findings emphasize the importance of introducing new or revised regulatory measures, chief among them being Islamic accounting standards and risk management."

A multilateral framework of rules controlling Islamic finance in the region was needed if the industry was serious about entering new markets, said Hatim al-Tahir, the director of Deloitte’s Islamic finance knowledge center in Bahrain.

“Failure cases have triggered interest in more transparency and disclosure,” he said, adding that “Increased corporate governance is needed within the management of Islamic finance products.”

Sizeable industry

The Islamic finance industry has assets of about $1 trillion and this amount is expected to grow even more as it is on the roll to attract more funds from the world’s Muslim population. But ripples of defaults and other financial problems involving Gulf companies shook investor confidence and led to questioning the 'regulations' ruling the industry.

In May last year Kuwaiti shareholding company Investment Dar missed a payment on a $100 million Islamic bond.

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“Although Islamic finance is expected to continue its growth path, the development of the industry’s infrastructure and regulatory framework is of high concern to most executives who took part in this survey,” Tahir said.

Only half of the firms participating in the survey said they had risk management systems in place to manage Islamic financial product requirements, and the survey showed that some institutions failed to develop risk management systems to address Islamic financial products. Also 64 percent of participants agreed that Islamic finance needs to implement risk management systems.

Disclosure procedures to identify important areas in which Islamic finance can develop a comprehensive risk management system was also recommended.

Standard legal framework

Despite the working of regulators in the GCC to examine ways to improve the assessment of risks in Shariah-compliant financial products, there is still an absence of a standard legal framework organizing this sector.

This hampers efforts to push the industry to grow internationally, said Rasheed al-Maraj, the governor of Bahrain’s central bank.

Islamic finance is expected to grow globally with the Islamic financial services board in Malaysia estimating a quadruple of the industry’s assets to $ 2.8 trillion by 2015, a huge increase from its 2005 figure of $700 billion.

Malaysia is considered to be the Islamic finance frontier, but both the UAE and Bahrain are vying to be regionally important centers for the industry.

UAE’s and Bahrain’s assets of Islamic banks last year stood at $65.8 billion and $26 billion, accounting for 16 percent and 11 percent of the total banking systems respectively in each of the Gulf countries.

Al-Tahir said there was room for both countries to offer complementary services within Islamic finance. While Bahrain was focused more on Islamic funds, the UAE was looking to establish itself as the capital of Islamic finance.