Islamic finance unscathed but need for tighter rules

The syariah finance industry, which abides by religious laws that prohibit the payment and collection of interest, is worth an estimated US$800 to US$950 billion (US$1 = RM3.20) and expanding in the Muslim world and in the West.

Moody’s Investors Service said earlier this month that the sector has a market potential of US$5 trillion.

However, the global economic turmoil which felled some mainstream banking institutions, and Dubai’s financial fallout late last year, has highlighted the need for the industry to shore up areas where it may be on shaky ground.

 

Dubai stunned financial markets last November when it said it might need to freeze debt payments by its largest conglomerate Dubai World. Last month it announced a debt restructuring plan with a US$9.5 billion funds injection.

“What happened in Dubai is affecting both the conventional market and the Islamic market because the players in the market totally forgot proper risk management,” says Badlisyah Abdul Ghani, chief executive of CIMB Islamic, a pioneer Islamic bank in Malaysia.

“A lack of framework regulations are the single biggest threat to Islamic finance growth today,” he said at a recent conference on syariah finance held in Kuala Lumpur.

In Islamic finance, the customer and the institution share the risk of any investment and also divide any profits between them.

“There’s nothing wrong with the Syariah structure, it’s the law of the land and the regulatory framework that needs to be sorted out to ensure an Islamic financial transaction can be carried out effectively,” Badlisyah said.

source : businesstimes.my

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