Islamic finance may be the answer to shock-resistant banking, however a proper framework governing all aspects of the sector needs to established immediately, says Tun Musa Hitam, chairman of the World Islamic Economic Forum.
In finance these days, it seems that everybody wants to become involved in Islamic banking. Every major city wants to be and Islamic banking centre. London wants to be a centre, Tokyo wants to be a centre, Singapore wants to be a centre, Hong Kong wants to be a centre.
The Islamic banking and financial services industry, with participation from conventional players, is now competing to service the global community. And the urge has been so strong and spontaneous that no one has had to push hard for Islamic banking and
finance to be accepted.
The whole world has been looking for a system to cope with problems related to the experiences gained from the recent financial crisis. Islamic banking, which embodies the universal principles of ethical finance and socially responsible investment, has built-in mechanisms to protect itself from extreme shocks. Because of aspects such as this one, the methodology of Islamic banking is fast becoming more acceptable, even beyond the shores of the Muslim world, with people increasingly buying into the idea of ‘finance with a moral compass’ as the new name of the game.
Apart from Islamic finance’s role in contributing to global financial stability, it also has the potential of supporting overall global economic growth. Islamic finance, involving financial flows between the Muslim and non-Muslim world, has revived and revitalized economic ties that generate mutually-reinforced growth prospects, and there is a realization of opportunities to look beyond the Islamic label.
There is, however, an urgent need for standardization of the product brand of the Islamic finance industry. In understanding rules and regulations and compliance, one cannot afford to be vague. One cannot afford to say: yes, maybe, I don’t quite understand.
The right conditions need to be put into place. These include an appropriate regulatory framework and an infrastructure and architecture that promote Islamic capital markets. Islamic finance and banking must be put in place systematically, with the involvement of all stakeholders. It will require getting a higher level of acceptance of banking with the necessary ingredients of “responsibility, transparency and accountability” as a norm in modern day banking.
Sure there is profit to be made with Islamic finance, and Islamic bankers are no angels in disguise. But they are still imbued with a discipline that is less averse to risks, they conduct more due diligence, and they are more wary. In other words, they practice safe banking.
The time is right for this. We see positive trends prevailing for the development of Islamic banking. In some countries, growth is as much as 10-15% annually. This is indeed most encouraging, and deserves full government support within the Organisation of the Islamic Conference countries. Malaysia has spent 30 years developing Islamic finance to successfully function in parallel with the conventional banking system. It is clear that Islamic finance can co-exist and thrive alongside the conventional banking system and it should be promoted much more with unity of purpose and consensus.
Tun Musa Hitam, the Deputy Prime Minister of Malaysia from 1981-1986, chairs the jury panel of the Royal Award for Islamic Finance which is organized by the Malaysia International Islamic Financial Center. He is also Chairman of the World Islamic Economic Forum.