The globalisation of Islamic finance offers huge potential for greater intermediation of cross border financial flows, especially surplus funds, between economies from different parts of the world, thus presenting new opportunities for the industry. Islamic finance is an increasingly important component of the international financial system and continues to gain global acceptance. As such, strengthening the accounting, financial reporting, auditing and disclosure standards are very much a vital part of this process, as it is for the conventional financial sector.
This was the message of Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, in her keynote address titled ‘Islamic Finance: Strengthening the Global Financial Market’ to the 18th World Congress of Accountants (WCOA) 2010 which was convened in Kuala Lumpur in early November 2010 and officially opened by Malaysian Prime Minister Mohd Najib bin Abdul Razak.
The Congress, with the general theme ‘Accountants: Sustaining Value Creation’, discussed the challenges to the industry in the aftermath of the recent financial crisis. The Congress attracted over 6,000 delegates, of which some 70 per cent were from abroad.
“As we enter this new phase of globalisation in which Islamic finance is very much a part of, the cumulative efforts of the standard setters, the regulators and the industry will raise the potential to address the many challenges before us. We need to leverage on the respective areas of strengths and address the weaknesses with unrelenting perseverance,” declared Dr Zeti.
In a global financial environment that is faced with extraordinary challenges of regulatory reforms and uncertainties, Islamic finance, with estimated funds under management totalling USD1 trillion, is proving to be a positive force. Shariah principles, stressed the Governor, require that financial transactions in Islamic finance be accompanied by an underlying productive economic activity that will generate legitimate income and wealth. As such this connects the sector to the real economy.
Its profit and risk sharing requires the appropriate due diligence, disclosure and transparency, and emphasise the importance of governance and risk management. The Shariah Board in the respective individual financial institutions is an extra layer of oversight. Not surprisingly, despite the turmoil and uncertainties in the global financial system, Islamic finance, she added, has demonstrated its resilience and its continued global expansion during this period, expanding at an average annual rate of 20 per cent and representing one of the fastest growing segments in the financial industry.
The sector has also been able to respond to the changing demands of consumers and businesses by providing the range of differentiated products and services, including consumer financing, asset and wealth management, Islamic insurance and capital markets products.
In Malaysia, for instance, the Islamic banking system accounts for 20 per cent of the total banking system while the Sukuk market accounts for more than 50 per cent of the bond market. Following the liberalisation initiatives in this decade, there is greater foreign institutional presence and substantial foreign participation in Malaysia’s Islamic financial system. The Islamic financial system in Malaysia is also well supported by a robust regulatory and supervisory regime, legal and Shariah framework, and payment and settlement systems that are also important in supporting its sustainability and second to none.
The globalisation of Islamic finance, advised Dr Zeti, has been due to increased liberalisation which has prompted Islamic financial institutions (IFIs) to venture beyond their domestic borders, with the result that there are over 600 IFIs that operate in some 75 countries today. Similarly, it has resulted in increased foreign participation to raise funds in these markets and has also strengthened financial and economic ties between Asia and the Middle East. Indeed, sukuk, which is growing at an average annual rate of 40 per cent, have emerged as an attractive new asset class for investors while becoming a preferred financing and capital raising option for issuers.
Dr Zeti commended the role of the Islamic Financial Services Board (IFSB) in contributing to the orderly global expansion of Islamic finance and to the development of a cohesive cross-border regulatory framework and international best practices for the Islamic financial system. The two new initiatives in 2010 – the establishment of the Islamic Financial Stability Forum (IFSF) as a platform for cross-border engagement among regulators to discuss efforts to achieve financial stability in the Islamic financial system, and the establishment of the International Islamic Liquidity Management Corporation (IILM) in October – a liquidity management infrastructure for Islamic financial institutions – will cumulatively contribute towards the continued resilience of the global industry.
On financial reporting, Dr Zeti observed that applying the existing accounting frameworks and conventions to Islamic financial institutions may prove to be more challenging given the unique features of Islamic financial transactions such as the equity based and profit sharing contracts. Given the risk sharing features of these contracts, it may raise the case for a higher level of transparency for users to better understand and be better positioned to assess the underlying risks and their likely financial impact.
Similarly, there are different views on how conventional accounting concepts, such as reporting based on substance over form, and cash flow discounting principles, can be applied to Islamic financial transactions. As such, Dr Zeti advised greater understanding on these issues to further evolve solutions that would improve the value of financial reporting.
She commended the work done by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in enhancing cross-border comparability of Islamic financial transactions. At the same time, the newly-established regional Asian-Oceanian Standard-setters Group (OSG) is examining the technical issues in financial reporting of Islamic finance.
“The efforts by AAOIFI and OSG represent important contributions to current efforts to evolve an accounting framework that is appropriate and that will support further the global development of Islamic finance. It is important that the standards setting bodies such as the International Accounting Standards Board (IASB) is engaged in this process to complement, and to leverage on the current global efforts to converge international accounting frameworks,” she urged.
source : mifc