KUWAIT, Nov 10 (KUNA) -- Governor of Central Bank of Kuwait (CBK) Mohammad Yousef Al-Hashel has said the Islamic Finance Conference (IFC) to be hosted by Kuwait tomorrow can provide a forum for global forum to develop a vision for the sustained growth of the Islamic financial industry.
The conference will build a platform for continued work in order to further cultivate and exploit the core competencies of Islamic Finance that make sustainable growth possible, he said in an interview with the International Monetary Fund (IMF) published on its website Tuesday.
Although still a comparatively small share of all global financial assets, the role and relevance of Islamic finance in the global financial system is gaining significance, he added.
He noted that the first theme concerns increasing financial inclusion through access to finance, which is vital in stimulating the economy and improving the welfare of the underprivileged, adding research suggests that over one third of the world's adult population -- about 2.5 billion people -- lacks access to formal financial services.
Islamic finance can help remedy this situation by promoting Islamic microfinance, financing to small and medium-sized enterprises, and micro Takaful (pooled insurance where shareholders contribute money to protect against loss or damage), he said, indicating that nevertheless, financial inclusion also requires enhancing access to basic banking services, creating a conducive regulatory environment, and promoting public awareness on financial matters.
He further said second, we will discuss how to strengthen regulation and supervision to foster financial stability, elaborating a recent IMF study noted that Islamic standard setters, including the Islamic Financial Services Board, have established "rules of the road," but these are not being applied consistently, potentially stifling the development of Islamic finance and creating systemic vulnerabilities.
He added continued efforts are needed to refine regulatory frameworks for Islamic finance institutions -- in line with recent recommendations of both the Basel Committee on Banking Supervision and the Islamic Financial Services Board -- while ensuring greater consistency in their application.
The governor said the third theme will cover the development of Sukuk (the Islamic equivalent of bonds) and other long-term Islamic finance instruments for infrastructure financing and sustainable development.
Sukuk have the potential to serve as high quality liquid assets, which is of increasing importance to regulators in the implementation of Basel III liquidity and capital adequacy frameworks, he said, noting but developing the Sukuk market requires further improvements to legal, regulatory, and disclosure norms, and stronger market infrastructure-including developing the secondary market.
Asked about the success factors that have led to the recent growth of Islamic finance, Al-Hashel said the key success factors anchoring the recent growth of Islamic finance have evolved over time and, to a certain extent, have changed the landscape of the industry.
He added there are many main reasons for the success: First, the characteristics of Islamic finance - such as the concept of sharing profit and loss, investments that are socially responsible and environmentally sustainable, and linking finance with real economic activities - have grown in popularity since the global financial crisis of 2008, and provide an alternative to more traditional financial products.
Among the reasons is the demand for Shari'ah-compliant financial services and products (retail, corporate), or for building infrastructure projects, in both Islamic and non-Islamic countries, has been on the rise, resulting in a large number of institutions entering the Islamic finance field for the first time, he said, referring that some of these institutions have been conventional banks eager to capture a share of a promising market through their Islamic window operations.
The third reason is the development of a broad range of innovative products and instruments by Islamic financial institutions, he stated, indicating such innovation has provided additional services to clients, but has also brought some added challenges to those institutions, as well as to their supervisors.
He said the fourth is the availability of a conducive regulatory framework and enabling infrastructure has been a key factor in the development of Islamic finance, adding this factor is prevalent in many countries where legal and regulatory amendments have been undertaken to accommodate Islamic finance.
Despite these positive developments, Islamic finance is still fragmented and many challenges lie ahead, Al-Hashel said, adding it remains to be seen whether the past successes can be sustained, particularly in light of the recent decline in oil prices.
Continued innovation and the collective effort of all stakeholders will be required to ensure sustainable growth and success going forward, he said.
Concerning key challenges facing Islamic finance, Al-Hashel said there are two interrelated challenges: one related to market development; and the other, establishing robust supervisory and regulatory frameworks.
With regards to market development, despite the notable strides that have been made, market penetration remains low - with Islamic financial assets accounting for only 1 percent of global financial assets, he explained.
Further, the structure of the Islamic finance industry is still very bank-centric and concentrated in a few countries, he noted.
"In addition, we face two types of regulatory and supervisory challenges. The first relates to the foundation of Islamic finance, including ensuring an enabling supervisory, regulatory and legal environment; a suitable accounting and auditing framework; supportive financial market infrastructure; and, capacity building. Addressing these is a pre-requisite for the successful development of Islamic finance," he said.
"We also face a number of regulatory challenges that are more evolving in nature, such as ensuring a level playing field for Islamic finance; implementing Basel III reforms; complementing micro with macro-prudential regulations; cross-sector and cross-border supervision; and safety nets and resolution regimes," he pointed out.
All the stakeholders, including Islamic financial institutions and regulators, are well aware of the ongoing challenges and of the need to address them, he stated. "However, we should keep in mind that improving market development and regulatory regimes are continuous processes in the context of changing industry needs and macroeconomic and demographic environments," he said.
Asked about the role of IMF with respect to Islamic finance, he said "the IMF has long been involved in Islamic finance. It has played a key role in the establishment of the Islamic Financial Services Board". The establishment of an Interdepartmental Working Group for Islamic finance also demonstrates the IMF's recognition of the importance of Islamic finance for many of its members, including the broader financial stability implications, he mentioned.
"While the IMF has made many contributions to Islamic finance, I believe, that it can endeavor to play an even more critical role for Islamic finance in the following areas: "Providing policy advice and capacity building in a broad range of areas. Technical assistance and training can help countries strengthen the regulation and supervision of their Islamic financial institutions, and develop domestic Sukuk markets. This engagement could usefully focus on providing a set of key regulatory practices, in areas such as liquidity and Shari'ah governance, with a view to achieving further convergence.
"Promoting further integration of Islamic finance with international financial standards to foster financial stability and improve prudential regulations across jurisdictions, including in the context of the IMF's annual economic consultations and Financial Sector Assessment Programs (FSAPs). In this respect, the IMF might wish to take into account the implications of Islamic finance for those members where Islamic finance is growing in significance.
"Facilitating the assessment of the regulation and supervision of the Islamic banking sector using the Islamic Financial Services Board Core Principles for Islamic Finance Regulation. These principles are aimed at providing a framework for the assessment of the quality of the regulatory and supervisory framework for the Islamic banking industry," he said.
As for Islamic finance in Kuwait, Al-Hashel said Kuwait has a bank-centric financial system, with the banking sector accounting for about 84 percent of the domestic financial sector.
The Central Bank of Kuwait has also played a vital role in the establishment of the Islamic Financial Services Board (IFSB) and the International Islamic Liquidity Management Corporation (IILM)- as it was a founding member of both institutions, he explained. Further, the Central Bank continues to play an active role through its membership in the board of directors and participation in working groups and technical committees using its extensive experience to contribute to the development of Islamic markets and regulatory frameworks, he said.
He said the growth in market demand for Islamic finance has been accommodated by establishing appropriate regulatory policies, noting in 2003, the Central Bank of Kuwait promoted a legislative framework by adding a special section to existing Law No. 32 of 1968, to establish prudent regulatory and supervisory policies and procedures for Islamic finance. This reflects "our view that Islamic banks, while being unique in their structure, remain an integral part of the financial industry, and that their services need to be regulated under one supervisory umbrella", he made clear.
The legislation has allowed "our Bank to formally develop prudential regulations for Islamic banks that are consistent with, and drawn from, the work of the Basel Committee on Banking Supervision and the Islamic Financial Services Board, he said. Doing so has established a level playing field for Islamic and conventional banks, while facilitating the development of more Islamic banks on a coherent and sustainable basis, he concluded. (end) fnk.abd.hm