Unlock Innovation and Embrace Technology – The IFSB Summit 2017 Concludes as the Way Forward for Islamic Finance
Date posted: 25 October 2017
25 October 2017, Abu Dhabi – The second day of the IFSB Summit 2017 saw thought leaders and key players of the Islamic financial services industry (IFSI) deliberate on the way forward for the Islamic finance industry, particularly in terms of strengthening value proposition while lowering transaction complexities through greater standardisation. The panellists were overwhelmingly of the view that the Islamic finance industry needs to embrace recent technological advances to improve its offerings, reduce transaction costs, and increase financial access to wider segments of society.
The second day of the IFSB Summit 2017 continued with the fourth session, themed, “Islamic Capital Markets: Towards Greater Harmonisation in Cross Border Activities”. It was chaired by Mr. Ashraf Mohammed, Assistant General Counsel and Practice Leader - Islamic Finance, Asian Development Bank. He recapped the surge in interest in Islamic finance after the global financial crisis with sukūk becoming the preferred instrument for fundraising by a number of sovereign and quasi-sovereign issuers. However, he noted persistent challenges in the corporate sukūk market and recommended supportive measures such as the elimination of tax shelter on interest payments, extension of tax deduction on expenses in the issuance of sukūk, and simplified regulations that enable transfer of asset ownership for sukūk issuers without additional cost. In view of a large investment gap, he viewed infrastructure financing as a promising segment for sukūk to venture into.
Dr. Obaid Al Zaabi, Acting Chief Executive Officer, Securities and Commodities Authority, UAE, stressed the need for achieving harmonisation in not only ICM regulations and legal frameworks, but also in widely acceptable global Sharīʻah Standards governing ICM products. He was concerned about the often higher fee structures of sukūk vis-à-vis conventional bonds and saw regulatory and Sharīʻah standardisation as a way forward to mitigate this challenge. He also identified scarcity of qualified staff in technical and Sharīʻah aspects of products as a limiting factor for the ICM.
Mr. Robert Scharfe, Chief Executive Officer, Luxembourg Stock Exchange, spoke about Luxembourg’s involvement in Islamic finance since as early as 1978, and highlighted an opportunity for Islamic finance to leverage upon the current momentum of the ESG (ethical, social, green) industries. He outlined converging elements between ESG and ICM in terms of investment policies, certification, use of proceeds, and so on. He considered shared challenges of green bonds and sukūk in terms of reaching critical mass, harmonising cross-regional compliance rules, lowering transaction costs, increasing performance and returns, enhancing visibility and liquidity in general.
Mr. Lilian Le Falher, Executive Manager, Head of Treasury, Financial Institutions and Capital Markets, Kuwait Finance House, Bahrain, conceded that particularly in the Gulf region, capital markets are not the preferred choice for corporates. Instead, they usually keep financial relationships at the banking level. Hence, for sukūk to gain traction, a lot more work is needed fundamentally to shore up the use of capital markets while also focusing on sell-side dynamics in terms of reducing transaction costs and time needed to issue sukūk.
The concluding session, themed “The Way Forward for Islamic Finance: Strengthening Value Proposition, Sustaining Resilience”, was chaired by H.E. Mubarak Rashed Khamis Al Mansoori, Governor, Central Bank of the United Arab Emirates. His Excellency summarised the various challenges discussed during the Summit sessions, particularly in terms of value proposition to the Islamic finance customers. Mr. Mustafa Serdar Bosca, Principal, The Boston Consulting Group, UAE, suggested that the value proposition by Islamic banks needs to go beyond simply offering good products; rather there is a need to build upon offering convenience and ease of transactions to the customer. This requires Islamic banks to unlock innovations through use of digitisation as well as attracting the right talents. Regulatory inputs are also needed to address structural challenges that hinder growth – such as the absence of Islamic interbank / money markets, of deep and liquid sukūk markets, of widely accepted pricing benchmarks for Islamic finance products, and so on.
Dr. Fahad Ibrahim Alshathri, Deputy Governor for Research and International Affairs, Saudi Arabian Monetary Authority, discussed recent global economic events that had led to some levels of polarisation and protectionist trends in international trade. Particularly for energy exporting countries, prolonged low oil prices caused large public sector deficits which present an opportunity for Islamic finance, particularly sukūk. He opined there is an urgent need to associate Islamic finance with the developmental agendas and needs of jurisdictions. For instance, he highlighted high levels of poverty and financial exclusion in the Organisation of Islamic Cooperation (OIC) countries as an area that Islamic finance should seek to urgently address.
Mr. Khalid Hamad Abdul-Rahman Hamad, Executive Director – Banking Supervision, Central Bank of Bahrain, highlighted that the comparatively smaller asset-size of Islamic banks implies an unfavourable increase in banks’ costs of compliance with new regulatory developments. Furthermore, lack of standardisation in Islamic finance practice also contributes to inefficiencies in the Islamic banking business models. A major deficiency is the lack of innovation – Islamic banks need to install robust Islamic treasury functions that go beyond controversial commodity murābahah products and instead develop more sophisticated approaches including issuing sukūk, utilising wakālah / muḍārabah contracts, and so on. He believed limitations on two fronts – effective risk management tools and a generally unfavourable perception – have led to underutilisation of muḍārabah / mushārakah contracts in Islamic finance.
Mr. Marzunisham Omar, Assistant Governor, Bank Negara Malaysia discussed Malaysia’s experience and stressed that it is incumbent upon regulatory and supervisory authorities to have the necessary market infrastructure in place to support Islamic finance. He lauded the IFSB’s work on prudential standards which can be used by jurisdictions to streamline their Islamic finance regulations. He consented that the growth of Islamic finance has moderated to single-digits in recent years, and that it may remain single-digit in the near future. Nonetheless, he suggested focusing on providing value to customers – not only to Muslim customers but to all segments of society – as a way of enlarging the target audience for Islamic financial products. This may be possible through a four-pronged approach focusing on innovation, talent development, technology utilisation and growing internationalisation of Islamic finance.
Overall, the Summit participants greatly valued the opportunity to interact with the panellists and discuss relevant questions for the furthering of the global Islamic finance industry. CBUAE Governor Al Mansoori concluded the Summit by recommending the industry stakeholders to take lessons from the discussions in the Summit and to put them into practice.
The two-day IFSB Summit 2017, themed “Reinvigorating the Momentum of Islamic Finance: Solidifying Resilience and Sustaining Growth”, in Abu Dhabi, UAE and hosted by the CBUAE ended yesterday. The event saw the participation of key Islamic financial services industry leaders, from among regulatory and supervisory authorities, international and regional multilateral organisations, financial institutions from over 25 countries as well as the local UAE financial community.
Back to top