Time to change perception

Oct 26, 2009 (Arab News - McClatchy-Tribune Information Services via COMTEX) -- LDNXF | Quote | Chart | News | PowerRating -- Islamic banking is the most accelerating business in the world and is becoming more and more important with Shariah-compliant products now being very popular in the Arab World, said two bank governors from Libya and Jordan.

The comments were made by Farhat Bengdara, governor of the Libyan Central Bank, and Umayya Toukan, governor of the Central Bank of Jordan, at a financial forum organized by Europe Arab Bank. The forum, titled "Managing the Crisis -- The Response of the MENA Regulators," was held at the London Stock Exchange last week.

Libya, of course, is a newcomer to Islamic finance. The North African Arab country does not have a standalone Islamic banking law or any authorized Islamic bank. Libya is one of several Islamic Development Bank member countries that have yet to open up their financial market to Islamic finance. However, the Central Bank of Libya recently allowed the local Wahda Bank, in which Arab Bank Limited of Jordan has an equity stake, to launch ad hoc Islamic financial products.

Wahda Bank has even signed an agreement with Path Solutions, the Kuwait-based Islamic financial software solutions provider, to install its core banking system iMAL to support the bank's retail, corporate and Islamic banking products. Antoine Sreih, chairman of Wahda Bank, confirmed that he is "confident that with iMAL, Wahda Bank will be able to launch new products to our customers with reduced time-to-market, become more efficient in our operations and decrease our costs." Both governors were skeptical whether a niche banking system could play a role in mitigating and managing the global financial crisis. "There are problems with Islamic banking as well. There are problems with the prudent regulations and there are also ethical problems because various scholars interpret what is halal (permissible) and what is not, so people are sometimes confused. There is not a well-established regulation system for Islamic products because a lot of Islamic products are a risky business. We have to consider the risk side," explained Bengdara. Toukan, who plays an important role in the activities of The Islamic Financial Services Board (IFSB) whose mandate is to set prudential and supervisory standards for the global Islamic banking industry, stressed that regulation governing Islamic products is still being developed. "Certain scholars interpret a product saying it is halal, but another group of scholars may have the opposite opinion. Until we resolve that, there is no higher authority. So we've not yet achieved a standard that guides us on each and every new Islamic banking product; there's no consensus on whether it's halal and there is some conflict of interest," added Toukan.Both governors are not exactly accurate in their assessments. In the case of Libya it could be a smokescreen for not liberalizing the financial services market in the North African country, whether Islamic or otherwise. Allowing a few Arab banks to take equity stakes in local banks is neither here nor there. Perhaps Bengdara should visit Malaysia where he will see the most systemic approach to banking and finance, whether conventional or Islamic. In countries such as Malaysia, Brunei, Indonesia and even Singapore they do not have the lack of regulation for the Islamic banking products that both Bengdara and Toukan allude to. They do not have the confusion over Shariah interpretations relating to Fiqh Al-Muamalat (Islamic law relating to financial transactions). This is because Islamic banking is a serious business that is being implemented systemically with all the laws, regulations, oversights and standards, and fully supported by the government. Of course, no banking market and jurisdiction is perfect. The current credit crunch and financial crisis bears testimony to that.

Malaysia's regulatory system in some respects is more advanced than even some G7 countries and the Gov. of Bank Negara Malaysia, the central bank, Dr. Zeti Akhtar Aziz, was recently named as one of the top central bankers in the world for 2009 by Global Finance magazine. Perhaps the two governors are really subconsciously alluding to their own region -- the Arab world, which apart from some Gulf countries, has failed to embrace the Islamic finance industry which started in its contemporary phase more than three decades ago.

The reason is that Islamic finance is wrongly seen in most Muslim countries as a politico-religious issue rather than an alternative system of financial management, but based on the faith principles of Islam. Some Muslim countries remain wary of Islamic finance because they wrongly again see it as an extension of so-called "Islamic fundamentalism."

Nevertheless, in London, Bengdara confirmed that the Central Bank of Libya is now allowing local banks to offer Islamic banking products. However, the Libyan regulator does not distinguish a product on the basis of whether they are Islamic or conventional, because it "is not the business of the Libyan Central Bank. Our business is to see what risks the products have and how do these products affect financial stability," he maintained.

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