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Monday, 13 August 2007

Islamic finance faces hurdles in bid to boost West exposure – IMF

DOHA: Islamic banking is expected to increasingly foray into the West but this could be hampered by the lack of hedging tools and the necessary integration with the rest of the financial stream, says an International Monetary Fund (IMF) paper.“Islamic banking has been making headway into an increasing number of Western countries. This is a trend that is likely to carry on, as oil exporting nations continue to accumulate wealth, GCC and Southeast Asian Islamic financial markets develop further and companies in Western nations keep competing to attract international investors,” said the IMF Working Paper.There are currently more than 300 Islamic financial institutions spread across 51 countries, apart from 250 mutual funds that comply with Islamic principles. Over the last decade, the (Islamic financing) industry has experienced growth rates of 10-15%, a trend that is likely to continue, according to the paper, authored by Juan Sole.Despite the rapid growth of Islamic finance in the last few years, many supervisory authorities and practitioners were “unfamiliar” with the process by which Islamic banks were introduced into a conventional system, it said.Terming Islamic finance as “uncharted territory” for most policy-makers and practitioners, the IMF paper said the current trend hinted that the sector would continue to increase its penetration and hence, policymakers and practitioners needed to become acquainted with the process and its implications for financial supervision.As Islamic financing expands, the supervisory authorities would have to ensure that these new institutions become fully integrated with the rest of the financial system, it said.“The integration process will not only allow Islamic institutions to operate, but also provide a comprehensive regulatory framework as well as develop a supportive financial infrastructure,” it said.Observing that Islamic financing lacked hedging instruments, the IMF paper said it resulted in the concentration of risks in a smaller number of institutions.“Overseeing the risks concentration and its potential impact on Islamic financial institutions should become a daily task for the regulatory authorities,” it added.Apprehending that financial products that were permissible in some countries could be deemed as non-Islamic in others, the paper said such disparity would discourage the cross-border use of Islamic products and constrain its growth potential, which could also “result in pernicious regulatory arbitrage”.In those jurisdictions where Islamic finance was still nascent, the regulators and financial institutions should familiarise with the standards set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and “apply them to the maximum extent possible”, it said.One of the main goals of the AAOIFI is to design and disseminate accounting and auditing standards that can be applied internationally by all Islamic institutions, it said, adding AAOIFI also played a crucial role in pursuing the harmonisation of Shariah-based rulings across jurisdictions.Furthermore, the pursuit of international consistency would not only ease the task of supervising internationally active institutions, but also ultimately favour the regulated institutions, as Islamic transactions will be better understood, becoming more attractive for Muslim and non-Muslim investors across the world, the study said.It would additionally foster the integration of Islamic institutions into the international community, the IMF paper added. - (GT, 13 Aug 07)

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