City skyline and central business district, Kuwait City, Kuwait: The market for
Islamic financial products is steadily going global (photo: Gavin Hellier/robertharding/Corbis)
CONFERENCE IN KUWAIT
Once a very esoteric industry, the market for Islamic financial products is becoming
more global. According to recent estimates, worldwide Islamic finance industry assets
exceed $1.87 trillion—a quantum leap from merely $150 billion in the mid-1990s.
In the lead up to the Islamic Finance: Meeting Global Aspirations conference
taking place on November 11, 2015 in Kuwait City, His Excellency Dr. Mohammad Al-Hashel,
Governor of the Central Bank of Kuwait (pictured), spoke with IMF Survey
about the role that Islamic finance plays in today’s global financial system.
IMF Survey: What is the purpose of the Islamic Finance Conference?
Al-Hashel: Although still a comparatively small share of all global financial
assets, the role and relevance of Islamic finance in the global financial system
is gaining significance. The Islamic Finance Conference can provide a forum for
a global dialogue to develop a vision for the sustained growth of the Islamic financial
industry, and build a platform for continued work in order to further cultivate
and exploit the core competencies of Islamic Finance that make sustainable growth
possible.
IMF Survey: What are the key issues and themes that will be discussed
at the conference?
Al-Hashel: The first theme concerns increasing financial inclusion
through access to finance, which is vital in stimulating the economy and improving
the welfare of the underprivileged. Research suggests that over one third of the
world's adult population—about 2.5 billion people—lacks access to formal
financial services. Islamic finance can help remedy this situation by promoting
Islamic microfinance, financing to small and medium-sized enterprises, and microTakāful
(pooled insurance where shareholders contribute money to protect against loss
or damage). Nevertheless, financial inclusion also requires enhancing access to
basic banking services, creating a conducive regulatory environment, and promoting
public awareness on financial matters.
Second, we will discuss how to strengthen regulation and supervision to foster
financial stability. A recent IMF study noted that Islamic standard setters,
including the Islamic Financial Services Board, have established "rules of the road,"
but these are not being applied consistently, potentially stifling the development
of Islamic finance and creating systemic vulnerabilities. Continued efforts are
needed to refine regulatory frameworks for Islamic finance institutions—in
line with recent recommendations of both the Basel Committee on Banking Supervision
and the Islamic Financial Services Board—while ensuring greater consistency
in their application.
The third theme will cover the development of Sukūk (the Islamic equivalent
of bonds) and other long-term Islamic finance instruments for infrastructure financing
and sustainable development. Sukūk have the potential to serve as high quality
liquid assets, which is of increasing importance to regulators in the implementation
of Basel III liquidity and capital adequacy frameworks. But developing the Sukūk
market requires further improvements to legal, regulatory, and disclosure norms,
and stronger market infrastructure—including developing the secondary market.
IMF Survey: What do you think are the success factors that have led
to the recent growth of Islamic finance?
Al-Hashel: The key success factors anchoring the recent growth of Islamic
finance have evolved over time and, to a certain extent, have changed the landscape
of the industry.
Let me highlight a few of them:
• First, the characteristics of Islamic finance—such as the concept of
sharing profit and loss, investments that are socially responsible and environmentally
sustainable, and linking finance with real economic activities—have grown
in popularity since the global financial crisis of 2008, and provide an alternative
to more traditional financial products.
• Second, the demand for Shari’ah-compliant financial services and products
(retail, corporate), or for building infrastructure projects, in both Islamic and
non-Islamic countries, has been on the rise, resulting in a large number of institutions
entering the Islamic finance field for the first time. Some of these institutions
have been conventional banks eager to capture a share of a promising market through
their Islamic window operations.
• Third, the development of a broad range of innovative products and instruments
by Islamic financial institutions. Such innovation has provided additional services
to clients, but has also brought some added challenges to those institutions, as
well as to their supervisors.
• Fourth, the availability of a conducive regulatory framework and enabling
infrastructure has been a key factor in the development of Islamic finance. This
factor is prevalent in many countries where legal and regulatory amendments have
been undertaken to accommodate Islamic finance.
Despite these positive developments, Islamic finance is still fragmented and many
challenges lie ahead. It remains to be seen whether the past successes can be sustained,
particularly in light of the recent decline in oil prices. Continued innovation
and the collective effort of all stakeholders will be required to ensure sustainable
growth and success going forward.
IMF Survey: In your opinion, what are the key challenges facing Islamic
finance?
Al-Hashel: There are two interrelated challenges: one related to market development;
and the other, establishing robust supervisory and regulatory frameworks.
With regards to market development, despite the notable strides that have been made,
market penetration remains low—with Islamic financial assets accounting for
only 1 percent of global financial assets. Further, the structure of the Islamic
finance industry is still very bank-centric and concentrated in a few countries.
In addition, we face two types of regulatory and supervisory challenges. The first
relates to the foundation of Islamic finance, including ensuring an enabling supervisory,
regulatory and legal environment; a suitable accounting and auditing framework;
supportive financial market infrastructure; and, capacity building. Addressing these
is a pre-requisite for the successful development of Islamic finance.
We also face a number of regulatory challenges that are more evolving in nature,
such as ensuring a level playing field for Islamic finance; implementing Basel III
reforms; complementing micro with macro-prudential regulations; cross-sector and
cross-border supervision; and safety nets and resolution regimes.
All the stakeholders, including Islamic financial institutions and regulators, are
well aware of the ongoing challenges and of the need to address them. However, we
should keep in mind that improving market development and regulatory regimes are
continuous processes in the context of changing industry needs and macroeconomic
and demographic environments.
IMF Survey: What role do you think the IMF can play with respect to
Islamic finance?
Al-Hashel: The IMF has long been involved in Islamic finance. It has played
a key role in the establishment of the Islamic Financial Services Board. The establishment of
an Interdepartmental Working Group for Islamic finance also demonstrates the IMF’s
recognition of the importance of Islamic finance for many of its members, including
the broader financial stability implications.
While the IMF has made many contributions to Islamic finance, I believe, that it
can endeavor to play an even more critical role for Islamic finance in the following
areas:
• Providing policy advice and capacity building in a broad range of areas.
Technical assistance and training can help countries strengthen the regulation and
supervision of their Islamic financial institutions, and develop domestic Sukūk
markets. This engagement could usefully focus on providing a set of key regulatory
practices, in areas such as liquidity and Shari’ah governance, with a view
to achieving further convergence.
• Promoting further integration of Islamic finance with international financial
standards to foster financial stability and improve prudential regulations across
jurisdictions, including in the context of the IMF’s annual economic consultations
and Financial
Sector Assessment Programs (FSAPs). In this respect, the IMF might wish
to take into account the implications of Islamic finance for those members where
Islamic finance is growing in significance.
• Facilitating the assessment of the regulation and supervision of the Islamic
banking sector using the Islamic Financial Services Board Core Principles for Islamic
Finance Regulation. These principles are aimed at providing a framework for the
assessment of the quality of the regulatory and supervisory framework for the Islamic
banking industry.
IMF Survey: What has been your experience with Islamic finance in Kuwait?
Al-Hashel: Kuwait has a bank-centric financial system, with the banking sector
accounting for about 84 percent of the domestic financial sector. Islamic finance
in Kuwait dates back to 1977 when the first Islamic bank, the Kuwait Finance House,
was established. Since then, it has witnessed significant growth and now constitutes
almost 39 percent of the country’s entire banking system.
The Central Bank of Kuwait has also played a vital role in the establishment of
the Islamic Financial Services Board (IFSB) and the International Islamic Liquidity
Management Corporation (IILM)—as it was a founding member of both institutions.
Further, the Central Bank continues to play an active role through its membership
in the board of directors and participation in working groups and technical committees
using its extensive experience to contribute to the development of Islamic markets
and regulatory frameworks.
The growth in market demand for Islamic finance has been accommodated by establishing
appropriate regulatory policies. In 2003, the Central Bank of Kuwait promoted a
legislative framework by adding a special section to existing Law No. 32 of 1968,
to establish prudent regulatory and supervisory policies and procedures for Islamic
finance. This reflects our view that Islamic banks, while being unique in their
structure, remain an integral part of the financial industry, and that their services
need to be regulated under one supervisory umbrella.
The legislation has allowed our Bank to formally develop prudential regulations
for Islamic banks that are consistent with, and drawn from, the work of the Basel
Committee on Banking Supervision and the Islamic Financial Services Board. Doing
so has established a level playing field for Islamic and conventional banks, while
facilitating the development of more Islamic banks on a coherent and sustainable
basis.
