By Siti Radziah Hamzah
KUALA LUMPUR, Dec 2 (Bernama) – Regulators and Islamic finance players are urged to adopt standardisation to facilitate growth of the industry as well as to facilitate seamless cross-border transactions.
The Central Bank of Bahrain's Executive Director for Banking Supervision, Khalid Hamad, said at present, different countries were adopting existing standards developed by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, the International Islamic Finance Market and the Islamic Financial Services Board.
"We feel that the Islamic finance industry is reaching maturity (but) needs to be developed further.
“But without proper standardisation globally and the existence of adequate volume of cross-border business, the Islamic finance cannot take the next step, which is globalisation," he said during an interview on the sidelines of the World Islamic Banking Conference held near the Bahrain capital, Manama, recently.
Currently, the majority of cross-border financial transactions were done through the conventional method, he noted.
Khalid said that in order for Islamic finance to achieve better results and more growth, international standards issued so far should be put back on the table for discussion.
He said standardisation was a critical factor for the success of Islamic finance globally, which represented a very small market compared with conventional finance.
“Islamic finance is mostly centred on domestic markets but this is up to regulators to decide if they are serious about growing the industry.
“It is the responsibility of the central banks. If the central banks make the decision and get serious about standardisation, you will see a totally different world,” he explained.
In October last year, Fitch Ratings said the lack of standardisation in Islamic finance was a significant constraint on the industry's growth.
It expects the industry's progress to be slow given the scale of challenges with greater harmonisation of shariah codification within and between jurisdictions often being cited as a limiting factor.
But the rating agency believed that was just one of five overlapping areas where greater standardisation and codification would be needed if Islamic finance was to gain wider acceptance among regional and international investors.
In terms of shariah compliance principles, Fitch Ratings sees product structure and documentation, supervisory and regulatory frameworks, law and dispute resolution as well as financial accounting reporting as main areas where standardisation would be advantageous.
Meanwhile, International Shariah Research Academy for Islamic Finance (ISRA) Executive Director Professor Dr Mohamad Akram Laldin said it was difficult to impose a particular standard on a country due to different legal and tax structures as well as regulatory requirements.
“It is very difficult to find one model that fits all. That is the reason why the approach to harmonise, to bring closer the different of views and difference of interpretations, (is important especially for) cross-border transactions,” he added.
Mohamad Akram said in the context of Malaysia, the country had worked for harmonisation between Islamic finance scholars’ views and interpretations of shariah for quite some time.
“We have the Shariah Advisory Council of Bank Negara Malaysia. To a certain extent all the products of the banks have to go through it. It is different for the capital market products which have to go to the Securities Commission’s Shariah Advisory Council.
“So, that process to the certain extent (is) reliable to bridge the gap between the different views of the scholars,” he pointed out.
Up to now, 15 standards have been issued by the Malaysian central bank which are mandatory for banks and takaful operators to comply with.
Mohamad Akram opined that standardisation in Malaysia’s Islamic finance industry was the most developed as regulators had put the mechanisms in the market and the country was among the first to establish a Shariah Advisory Council.