Dear Ali Sakti,
Monetary Authority of Singapore managing director Heng Swee Keat says one of the most significant lessons about the ongoing financial crisis is also the most basic, that is, finance needs to return to its basic function of allocating scarce capital to the most productive uses, with the capital earning an appropriate risk-adjusted return.
In this regard, the underlying precept in Islamic finance of not using capital for speculation but to build productive capacity and generate sustainable economic growth takes on great relevance. He is confident that by adhering to this basic precept, Islamic finance will assume a more prominent role in the coming years.
He also feels that regulators, financial institutions and investors all have a role in bringing about an effective regulatory regime. Singapore has taken a further step: it has placed the primary responsibility for sound risk management and oversight of each institution on the board and senior management, which, Heng says, must set the right tone and culture.
At this week’s World Islamic Banking Conference which Heng attended, Hari Bhambra, senior partner at Praesidium, spoke of Islamic finance products having potential take-up in markets like the US, where they may be repackaged as ethical or moral products, like the “green” or Christian funds already on offer.
In supporting ethical finance, Fair Capital CEO Iqbal Ahmed Khan welcomed the idea of “an alliance of goodness” with other ethical products around the world. Islamic finance needs to be an agent for “democratized wealth, to bring more people into the banking system”, he said. “It could create a major force of goodness, and hopefully will address the needs of the most vulnerable members of society."
That’s a rosy picture. But the reality is that Islamic finance has a long way to go even in the basic requisites of education, communication and acceptance. On top of that, according to this week’s DIFC Forum, the Islamic banking industry has a confidence problem. It won’t become a major force in the GCC until current investors gain confidence in their own regional structures, and sovereign wealth funds are invested locally, rather than in markets like New York or London, the panelists said.
Another point of view was from Ahmed Khan, CEO of Fajr Capital. He felt that Islamic finance should play a role in finding solutions to support people who belong to the most vulnerable sections of society. “The financial crisis will affect poverty reduction budgets around the world and there is a risk of increased polarization between the rich and the poor. Islamic finance can play a role in helping the poorest sections of society by finding creative solutions to support them.”
Bahrain Central Bank governor Rasheed Al Maraj meanwhile reminded the Islamic financial industry on the importance of risk diversification, good liquidity management and sound corporate governance if it is to continue to enjoy a framework for stability against the background of global financial turmoil. He suggested that the industry develop a greater diversity of business models, more diverse and stable income sources, and more robust risk management and stress testing techniques.
It certainly was a week of brainwaves.
The next issue will be available from Friday 5th December 2008.