Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

The IFSB is to serve as an association of institutions that have responsibility for the regulation and supervision of the Islamic financial services industry. The aim is to set and disseminate standards and core principles as well as adapt existing, mainly AAOIFI, standards. Adoption of the standards will be voluntary, but banks and countries that adhere to the standards are likely to be more favourably rated. The IFSB is also responsible for liaison and cooperation with other standard setters, including central banks and security market regulators, in the area of monetary policy and financial stability, opening up the possibility of the adoption of shariah law in this area for the first time. In addition the IFSB is responsible for the promotion of good practice in the area of risk management through research, training and technical assistance.

At the inaugural council meeting of the IFSB it was announced that Dr Rifaat Karim had been appointed as Secretary General of the organisation for a period of three years until 2005. A technical committee was established of representatives of the Bahrain Monetary Agency, the Islamic Research and Training Institute of the Islamic Development Bank, Bank Markazi of Iran, the Central Bank of Kuwait, the Banque du Liban, Bank Negara Malaysia, the State Bank of Pakistan, the Saudi Arabian Monetary Agency and the Bank of Sudan. Annual subscriptions were set at a modest $30,000 for full members, $20,000 for associate members and $10,000 for observers. The membership application by Qatar was approved at the inaugural meeting.

Dr Zeti Akhtar Aziz, the Chairman of the Steering Committee of the IFSB and Governor of Bank Negara Malaysia, stressed at the inaugural meeting how shariah injunctions “interweave Islamic financial transactions with genuine productive activities and prohibit involvement in illegal and unethical activities.” He stressed how “this intrinsic principle of governance contributes towards insulating the Islamic financial system from the potential risks of financial stress triggered by excessive leverage and speculative financial activities.”

In practice the major challenges facing the IFSB are likely to involve benchmarking. The differences between Fiqh scholars in the Gulf and Malaysia over what constitutes the acceptable working of financial instruments are difficult to resolve. Malaysia’s pragmatic attitude to Islamic banking is in part driven by the objective of Bank Negara to see Islamic assets account for 20 percent of all bank assets in the country by 2010. This is encouraging conventional banks to offer Islamic financing facilities that conform to the letter of local shariah interpretation by devising products with Islamic names. The actual working of the products is little different from their conventional equivalents however, raising doubts about the meaningfulness of the exercise. Malaysia, for example, has an inter-bank market in Islamic debt securities but the returns in the market move in line with interest rates. The Public Bank’s Islamic overdraft scheme seems to differ little from conventional overdrafts, and its offer of long term housing finance through al bai bithaman ajil rather than ijara leasing seems questionable.

AmBank of Malaysia, another primarily conventional Malaysian bank, has been offering designated Islamic products since 1994. Its chairman, Ahmad Zani Othman, speaks of raising capital by “structuring the same deal but with Islamic principles in it. It is not about reinventing the wheel but modifying what has existed in the market.” Such a methodology is arguably flawed however, as Islamic finance should be about new product innovation from basic shariah principles rather than simply re-engineering conventional products. The Securities Commission rather than Bank Negara regulates most Islamic instruments in Malaysia, but as the former is not a member of IFSB, this raises additional questions.

Differentiating Islamic financial instruments by global product rather than national segmentation
Globalisation can facilitate standardisation of financial instruments so that national differences become less pronounced or even cease to exist. This not only applies to conventional finance but also to Islamic finance, despite differences in shariah interpretation between Muslim countries. Even when foreign exchange restrictions and capital controls are removed, markets may remain segmented by different national legal systems and differentiated financial products which potential foreign users find it hard to understand and appreciate. As Islam is a universal religion, financial products designated as Islamic should arguably reflect the Muslim value systems rather than national characteristics.

Page 9

www.ifsb.org
“IMF facilitates establishment of Islamic financial services board”, IMF News Brief 02/41, Washington, May 1st 2002.
Mohsin S. Khan, Monetary Policy and Central Banking in an Islamic Context, unpublished paper, Bank of England Conference on Islamic Banking, 7th – 8th May 2002, pp. 21-22.
“IFSB appoints Rifaat as first sec-gen”, The Star Business, Kuala Lumpur, 5th November 2002.
Press release by the Islamic Financial Services Board, Kuala Lumpur, 3rd November 2002.
“Islamic banking enjoys steady growth in Public Bank group”, The Star Business, Kuala Lumpur, 1s November 2002.
Mokhtar Hanafiah, “AmBank seeks foreign tie-ups”, The Star Business, Kuala Lumpur, 1st November 2002.
Zainal Azam Abdul Rahman, Strengthening Research and Development Efforts in Islamic Banking and Finance, paper presented to a workshop at the inaugural meeting of the IFSB cited by Mokhtar Hanafiah, “Global approach to developing banking products”, The Star Business, Kuala Lumpur, 5th November 2002.
“AmMerchant Islamic products value set to double this year”, The Star Business, Kuala Lumpur, 1st November 2002.