Mature regulation would sustain Islamic sector growth
- UAE central bank working on more sophisitcated regulations for Islamic finance
- Standardisation would underpin the expansion of Islamic finance
- More sharia-compliant liquidity management instruments are needed
The UAE is preparing Islamic finance regulations and forming a Higher Sharia Authority (HSA) to standardise Islamic banks accounting and structures, according to Mubarak al-Mansoori, governor of the UAEs Central Bank, speaking at the Global Islamic Economy Summit in Dubai on 5 October.
Mature regulations and standardised structures for Islamic finance products would allow UAE banks to scale up their business, expand abroad and make the UAE the global hub for the Islamic economy.
The Islamic finance sector has been growing at 16 per cent a year and now makes up 9.8 per cent of banking assets in the UAE, and 21.7 per cent of credit. Islamic finance proponents hope to capture 50 per cent of the market by 2020.
But continued growth depends on more sophisticated regulation and supervision by the central bank and international institutions.
The central bank is working on initiatives to strengthen regulation and supervision for Islamic banks, according to international guidelines such as Basel III, and shariah boards, says Al-Mansoori. We need to constantly review and revise these regulations to ensure the prudent behaviour of Islamic banks, which is so important to trust in the sector.
CEOs of UAE Islamic banks agreed that mature regulations would help the industry grow, but warned against too much standardisation.
To a certain extent we need standardisation, says Adnan Chilwan, CEO of Dubai Islamic Bank. The conventional space has a basic set of rules, but also variety. If we start standardising everything you have the same set of products. That would kill competition and the industry would go backwards not forwards.
The CEOs differed as to how close the supervision should be.
We cannot industrialise the process , we cannot go to multiple markets and scale up if it is not standardised, says Tirad Mahmood, CEO of Abu Dhabi Islamic Bank. We need this to speed up growth. We can maintain features of the products, innovation and uniquenesss, but without a standardised basis this will be a local industry.
There is no global, unified set of rules and structures in Islamic finance, meaning the market is highly fragmented.
Islamic banks are also lacking profitable instruments to invest in, so liquid assets remain idle.
There is a lack of tradeable, sharia-compliant liquid assets, says Al-Mansoori. The International Islamic Liquidity Management Corporation is issuing $12bn of short-term liquidity instruments globally, and the central bank issued its first Islamic certificates of deposit in 2011.
The central bank issued AED19.6bn of these certificates in August 2015.
UAE Islamic bank CEOs called for separate liquidity regulations, as Basel III requirements are designed around the accounting practices of conventional banks.
Islamic banks need liquidity management tools to invest their abundant liquidity, says Mahmoud. We need standardised legal agreements . Islamic banks are governed by two regulators, sharia boards and the central bank, and they have to please both. We cant make standardised requirements on our own. These three things would level the playing field with the conventional banking sector.