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Wednesday, 22 August 2007

Introducing Islamic Banks into Conventional Banking Systems - IMF Report

Islamic financial institutions, despite their increasing popularity among Muslims as well as many non-Muslims, operate in an industry that is not very easily understood or regulated, according to a recent International Monetary Fund (IMF) working paper. "Islamic finance is still uncharted territory for most practitioners and policymakers," said the IMF in a recent report titled "Introducing Islamic Banks into Conventional Banking Systems." Islamic financial institutions must follow Islamic interpretations of the Quran. For example, an Islamic bank may not charge or pay interest and cannot invest in anything that is prohibited, such as investments related to gambling, alcohol or pork. It is imperative that Islamic banks follow standard procedures and guidelines to make for better oversight, especially because these banks have experienced an unprecedented annual growth rate of 10 to 15 percent, according to the IMF. Today there are more than 300 Islamic banks located in 51 countries. In addition, there are 250 mutual funds that adhere to Islamic banking principles. While the IMF claims that it is possible to establish a set of rules and guidelines that are specific only to the Islamic banking products, Mahmoud Amin El-Gamal, an employee of the U.S. Department of Treasury Office of International Affairs, does not quite agree with the IMF. El-Gamal explains that Islamic finance and the varying opinions and expressions are no more than a "prolonged reinvention of the financial wheel" in an August 2006 opinion. He continues that if one takes a closer look as to how Islamic products evolved, one recognizes that the products moved "closer to its conventional counterpart." What Are Islamic Sharia Laws? There is a myriad of divergent opinions concerning products that may or may not be compliant with Islamic Sharia laws, a.k.a Islamic laws, laws that come from the interpretations of the Quran. Scholars and those conversant in Sharia law interpret them differently, depending on how deeply they have studied such laws, how conservative they are in interpreting such laws and which particular group they belong to. Also, somehow, interpretation could vary from one country to another—although no one was able to clearly explain why, cultural roots and conservatism were some of the reasons brought forward. El-Gamal argues that one can find many different approaches and guidelines at Islamic Banks in a country, but even greater differences are found when one looks at the sector in another country. For example, Malaysia's Islamic financial sector has become increasingly more sophisticated than that of its Middle Eastern Arab countries. But, its Islamic banks rely heavily on the opinion of Islamic jurists instead of that of Sharia practitioners and thus its products offered may not be acceptable under Sharia laws of another country. Islamic Banking Compliance: An institution that offers Sharia compliant products must appoint a board with at least one Sharia counselor, who must be someone knowledgeable with Sharia law and generally is a Sharia scholar or Mullah (someone who was trained in Islamic laws). The UK-based Kleinwort Benson Private Bank Ltd. set up an Islamic investment fund in London in 1986 to attract Middle Eastern investors, but neglected to create a Sharia board. The fund did not take off until a Sharia board was appointed, according to IMF. Bahrain created the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in 1991, which launched an international professional Sharia law compliance program that teaches "technical subjects that are essential to Sharia compliance and review processes for the international Islamic banking and finance industry," according to an August press release. AAOIFI offers periodic training for regulators and others involved in overseeing the financial sector of countries adhering to Sharia laws. In 2002, Malaysia established the Islamic Financial Services Board, an international standard-setting body for Islamic financial regulatory and supervisory agencies. IMF advises that regulators should be transparent and state clearly their rules and regulations and that all should be applied across borders. Banking licenses should be restricted to those institutions that have a proven track record and clear understanding of Islamic financial principles. - (TET, 21 Aug 07)

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