Business

Friday November 6, 2009

Success creates ‘gaps’ in Islamic financial system


PETALING JAYA: The rapid growth of Islamic finance has opened up “gaps” in the syariah-based financial system, and the industry needs to address this, according to the Securities Commission (SC).

“The legal and regulatory framework particularly needs to be revisited in order to address cross-border issues and various systemic risks,’’ SC managing director Datuk Nik Ramlah Mahmood said in her speech on Wednesday at the Kuala Lumpur Islamic Finance Forum 2009 (KLIFF 2009).

She said the current set-up fulfilled the requirments of syariah committees or the internal decision-making processes of institutions, but did not meet general industry needs on how resolutions should be achieved.

Another area which needs work is in the area of investor protection.

She said there was a need to ensure investor-protection principles were properly embedded in Islamic finance product structures.

“Opacity in the market and products are anathema to Islam and create latent risks to investors.

“In addition, there is a need to deal with conflict of interests issues in product structures,’’ she said.

Nik Ramlah also stressed on the need to promote “greater harmonisation,” not only in relation to Shariah standards, but also in the key areas of disclosure, transparency and market practices.

“It is critical that we safeguard confidence in the Islamic financial system through promoting greater standardisation in documentation, providing greater legal and regulatory certainty and high levels of transparency,’’ she said.

Nik Ramlah also called for increased co-ordination and collaboration among jurisdictions, Islamic institutions and conventional financial institutions.

“It might be a tall order for the moment to talk of a single Islamic market, but we are in a position to make a start through converging standards within and across jurisdictions so that eventually we can create the necessary,’’ she said.

“Lastly, we must promote the development of common hisbah standards for commercial and financial practices.’’

It has been estimated that current global Islamic financial assets have reached US$750bil and are expected to expand to US$1.6 trillion by 2012.

However, compared with the estimated US$178 trillion in financial assets worldwide, current Islamic financial assets accounted for less than 0.5% of the global total.

  • E-mail this story
  • Print this story