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Friday, 27 July 2007

Lack of standards hit Islamic banks’ assets: McKinsey Report

DOHA: Islamic banks’ assets, growing at 15-20% per annum, touched $400bn in 2006, which was less than 1% of global banking assets, according to a report by managing consulting firm McKinsey. McKinsey said this was because the sector’s growth was “hampered” by regulations. Rational licensing policies that do not insulate Islamic banking sector from competition and a central Shariah board for establishing national standards to create the platform for them to expand beyond national borders were imperative for the sector’s vibrant growth, it suggested. Lack of standards inhibited the development of international Islamic banking markets and resulted in an industry that was little more than a collection of national strongholds, also said the report, authored by Nasr-Eddine Benaissa, Xavier Jopart and Ozgur Tanrikulu, highlighting that as of now there are about 270 Islamic banks.“Despite recent growth, assets held by Islamic banks remain at less than 1% of global banking assets. In Islamic countries, penetration varies considerably,” it said.In Qatar, Islamic banking assets were 14.4% of the total banking assets in the country in 2005, up from 12.1% in 2001, whereas in Bahrain, it was 14.4% (against 17% in 2001), Kuwait 21.6% (15.8%) and the UAE 11.8% (7.2%).Finding that some national regulators shielded Islamic banks from real competition, thus relieving them of external pressure to improve their performance, the report said regulators “would have to tackle these issues to propel the sector further out of its niche and into the mainstream”.Asserting that the regulatory frameworks governing Islamic banks were a vital influence on the banks’ overall performance in each national market, the report said the wide variation in regulations from country to country was “probably the main explanation for the similarly wide variations in growth and performance across markets.”“It will continue to be a strong influence on them as they evolve,” the global consultant’s report said.Stressing that the countries starting to develop Islamic banking regulations should consider how their efforts contribute to the global harmonisation of Islamic banking practices, it said “no such standards have been developed, so it is difficult for players to exchange best practices across markets and to expand abroad.”Ideally, the evolving regulatory model should put all institutions – Islamic and conventional – on the same competitive footing and create a transparent market, it said.“Banks should not be able to hide lax customer service or operations behind Sharia credentials. In addition, policies should promote the use of separate Islamic banking balance sheets and income statements that would provide complete information on the Islamic banking market and reduce the asymmetry of present information,” McKinsey said.On the licensing policy, the report said experiences showed that the Saudi and Malaysian models had fostered the competition. In Saudi Arabia, a single licence and compliance framework covered all banks – a system that avoided any differentiation between Islamic and conventional institutions and allowed every bank to offer both the products, whereas it was the same case with Malaysia, although it offered three kinds of licences.Though requiring banks to be either Islamic or conventional might seem necessary to create a clear distinction between the two and to raise the credibility of the Islamic banking sector, the report said “it creates a walled garden around Islamic banks, insulating them from competition.”Protected Islamic banks, convinced that religious credentials alone will sustain them, “are often complacent” and that their innovation, quality of service, convenience and operations improvements suffered, thus landing them behind their conventional counterparts, it said.“The most suitable framework is one that allows banks to choose what they offer and doesn’t constrain them through a tight licensing policy,” it said, adding “if Islamic banks are to compete with the conventional ones, then innovation and speed are crucial.”“A central Shariah board benefits from precedents and experience and over time it should make faster and more uniform decisions, which lightens the burden for the (Islamic) scholars on the committees of individual banks,” McKinsey said.It would mean that these committees (of individual banks) needed fewer scholars since they can draw upon the central board’s opinion rather than having to explore each fresh topic from scratch, it also said. - (GT, 27 July 07)

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