‘Islamic finance not a panacea for all ills’

By Sumathi Wong
The global economic crisis may not necessarily have been averted by Islamic finance as the sector has yet to reach a critical mass to prove it, says the head of a foreign bank in Malaysia.
HSBC Bank Malaysia Bhd deputy chairman and chief executive officer Irene M Dorner said another critical issue for Islamic finance is the preparedness of regulators to modulate the industry, especially when it moves beyond replication of the conventional product profitsharing and risk-sharing.
"Whilst Islamic banking is definitely the future, please don't go away with the idea that it's the panacea for all ills. It's not. "If you move into the next phase of Islamic banking, beyond the conventional products — the profitsharing, risk-sharing, and so on — I'm not sure how you can regulate that," Dorner told the 13th Malaysian Banking Summit 2009, organised by the Asian Strategy and Leadership Institute (ASLI), in Kuala Lumpur yesterday.
Other panelists at the CEO forum, entitled "Coping with tough times: How banks can survive and thrive amidst the global financial crisis", were Malayan Banking Bhd (Maybank) president and chief executive officer Datuk Seri Abdul Wahid Omar and Hong Leong Bank Bhd group managing director and chief executive officer Yvonne Chia.
Dorner noted that there have been suggestions the current crisis would not have happened if the whole world had been utilising Islamic finance. "There have been various pundits in the press saying it wouldn't have happened.
"Actually, there's insufficient Islamic finance in the world for anybody to say whether that is true or not true," she said.
Malaysia's Islamic banking sector registered double-digit growth over the past eight years with an average annual growth rate of 20% in terms of assets. As at the end of 2008, the share of Islamic banking assets in the total banking sector has expanded to 16.7% compared to 6.9% in 2000. Dorner's caution, particularly on the critical role of the regulators, was also was raised at the 6th Islamic Financial Services Board (IFSB) Summit held in Singapore last week.
IFBS secretary-general Prof Rifaat Ahmed Abdel Karim told the summit that "every financial institution requires close supervision, regardless of whether it is conventional or Islamic".
Monetary Authority of Singapore's (MAS) managing director Heng Swee Keat in his welcoming remarks at the meeting said, "While Islamic finance has features that make it robust, there are also risks such as liquidity and concentration risks that demand special attention."

(This story appeared in The Malaysian Reserve on May 12, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)