Beirut , 19 May 2006 – An effective legal infrastructure for the Islamic financial services industry has to be developed in a SMART way – Specific, Measurable, Attainable, Realistic and Time-bound. This was the proposition made by Mr Neil D. Miller, a partner of Norton Rose, London at the 3 rd Islamic Financial Services Board ( IFSB) Summit held at the Phoenicia Intercontinental Beirut, today. Speaking in the session entitled “Legal Infrastructure Aligned to the Evolving Industry Needs”, Mr. Miller submitted that while there have been suggestions for standardization of financial contracts, which may reduce costs and risks of Islamic financial products, standardization has limited roles in meeting legal objectives and therefore has to be done selectively in order to avoid hampering the necessary innovations in the Islamic financial services industry.
Her Ladyship Justice Rohana Yusof, a High Court Judicial Commissioner from Malaysia, in sharing the Malaysian experience, explained that the legal framework in Malaysia is unique in the sense that while the Shari’ah has long been recognized as the law of the land, the administration of law is based on the English common law system inherited from the British colonial. As a result, Shari’ah principles have been consistently assimilated into the judicial process, whereby certainty and predictability of law are cemented through binding legal precedents. In addition, the establishment of a National Shari’ah Advisory Council under the Central Bank Act allows the Council to have specific statutory mandate in facilitating the development of Islamic finance through a centralized fatwa (legal edicts)-making process.
Professor Barry A.K. Rider of Cambridge University submitted that the legal prohibition of usury upheld by Islamic finance is not a new phenomenon, as there is a long history of similar restrictions throughout human civilizations, dating back from the age of Hammurabi Code, Roman Laws and early Christian teachings. Hence, while recent legal reforms to accommodate Islamic finance are more driven by legalistic concerns over consumers and investors protection issues, in due course the real economic benefits of such reforms will submerge as a contributing factor towards providing more depth in the financial system.
In the session entitled “Infrastructure for Good Governance and Market Discipline” the speakers conceded that market discipline can only be effective in an environment where there is timely and adequate information flow. In this respect, the Islamic financial services industry is still perceived as lagging behind, therefore needs to reinforce its commitment towards better transparency and governance regime.
Elaborating the subject, Mr Stephen Hohl of the Financial Stability Institute, Switzerland is of the view that market discipline is still largely evolving in the financial system. As the Basel Core Principles as well as its methodologies continue to be used as benchmarks for sound regulatory practice, direct and indirect market discipline are expected to influence financial institutions and market participants (including customers and investors) to behave in accordance with the internationally accepted prudential and ethical norms. The board of directors and the senior management hold primary responsibilities in meeting the appropriate disclosure expectations amongst the various stakeholders.
Accounting expert, Professor Simon Archer of Surrey University, UK argues that most institutions offering Islamic financial services (IIFS) operate in a weak information environment whereby information intermediaries such as financial analysts and journalists as well as credit assessment institutions are generally lacking. He promulgates improvements in accounting and auditing practices of IIFS, which to a certain extent, should be more extensive than the requirements of the International Financial Reporting Standards. “Since most IIFS are small by international standards, and are located in emerging market countries, transparency can be a more useful and cost-efficient tool for them to comply with international best practices while at the same time gaining competitiveness against bigger players”, he said.
Dr John Lee Hin Hock of KPMG Consulting Malaysia highlights that most of the market participants in IIFS are currently passive investors, thereby the need for consumer education in order to nurture an effective market discipline. He says that this may require a more proactive effort by supervisory authorities in empowering the market participants with adequate financial awareness. Dr. John Lee applauds the IFSB’s initiative in complementing the international corporate governance and market discipline regime through introducing its own standards, tailored to the specificities of IIFS.
In the closing session entitled “Vision and Prospects”, the speakers came to an agreement that despite the many inroads made in recent years, the Islamic financial services industry still needs to overcome several key challenges relating to capital adequacy, risk management, governance and market discipline, liquidity management as well as harmonization of Shari’ah practices. There is also the strong need to continue adding depths in the capital market development, financial engineering as well as product innovations, in order to remain competitive against its conventional peers. The consensus was that the industry requires a solid and coherent regional and international cooperation and integration before it can be fully recognized as an integral part of the global financial system. The panel comprises H.E. Dr Ahmed Jachi, First Vice Governor of Banque du Liban, Mr Charles Enoch, Deputy Director at the International Monetary Fund and Mr Wafik Grais, Financial Sector Adviser of the World Bank.
The IFSB Summit, themed “Aligning the Architecture of the Islamic Finance to the evolving Industry Needs”, is one of the most prestigious annual gatherings of regulators, bankers, scholars and practitioners in the Islamic financial services industry. Held under the high patronage of H.E. Fuad Siniora, Prime Minister of Lebanon, and hosted by Banque du Liban, it discussed key issues pertaining to soundness and stability of the Islamic financial services industry.
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