‘Islamic finance must strengthen to grow’

by Alfean Hardy
The Securities Commission sees the opportunities provided to the global Islamic financial sector as a result of the global financial crisis but necessary steps have to be taken by the industry if it is looking to become a viable alternative to its conventional financial counterpart, its managing director Datuk Dr Nik Ramlah Nik Mahmood said.
In her keynote presentation at the 6th Kuala Lumpur Islamic Finance Forum (KLIFF) in Kuala Lumpur yesterday, Nik Ramlah said that Islamic finance had been given the unique opportunity for renewal and universal acceptance given the levels of disenchantment with the current financial system.
"Islamic finance is shaping into a potential candidate to provide the system architecture that can constrain the excesses inherent in the current global financial model. Its rapid growth signifies that is has moved past the pioneering stage and established shahriah-compliant financing instruments as a commercially viable and effective tool for mobilising investment assets to finance productive economic activities," she said.
Nik Ramlah said that, in the light of these successes, it was only natural that gaps would appear and that these hurdles need to be continuously addressed. She said that the industry needed to be humble and take heed of the lessons brought about by the global financial crisis.
"No system is completely insulated from asset bubbles and contagion. In restrospect, the nature of the contracts and other Shariah-compliant requirements did provide Islamic finance some degree of insulation (but) we must ensure that there's a speedy and reliable dispute resolution process. "While the application of the Shariah alone is sufficient for ensuring that the form of transactions are compliant, issues could arise if the contracts under which they're structured don't address clearly the rights or obligations of parties," she added.
Nik Ramlah said the industry had placed great emphasis on transplanting substantive norms from the classical Shariah practices.
"It's also now evident that similar emphasis needs to be placed on ensuring sufficient interface with the process of developing new legal contracts to minimise the risk of unresolved issues. Conceptual clarity without legal certainty is clearly insufficient.
"We recognise how the Islamic financial system of the past had operated in an efficient,organised and ethical culture.
However, that implicit institutional arrangement that had developed and allowed the system to flourish were not formalised, conventions and practices were not codified, roles and responsibilities not clearly defined, and contracts were enforced through self-intellective discipline.
There were no stewards to sustain this arrangement for the longer term," she added. "In order for Islamic finance to respond to current global needs, the industry needed a renewal and tightening in its practices.
"History doesn't often offer the same people the same opportunity twice. However, we're fortunate and should not miss this opportunity to establish a strong regulatory and institutional foundation for more than just Islamic finance. We must learn from the past and continue to improve ourselves and our capabilities.
"The industry must also be prepared in totality to meet global needs in terms of documentation and dispute resolution. The legal and regulatory framework, particularly, need to be revisited to address cross-border issues and various other systemic risks," she concluded.

(This story appeared in The Malaysian Reserve on Nov 5, 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)