One of the most prominent economists in Islamic finance has called for the creation of an “apex body” that would set policy for the industry globally, to cut risks that could contribute to a financial crisis.
Tariqullah Khan, professor of Islamic finance at Qatar’s Hamad bin Khalifa University, proposed the body comprising national regulators, central bankers and other stakeholders in a paper posted on a LinkedIn forum for Islamic finance. He is one of the most senior figures in the industry to back such an idea. It would help to promote the standards of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Malaysia-based Islamic Financial Services Board (IFSB).
“The implementation of IFSB and AAOIFI standards and the bringing together of disputing parties is critical to remove structural risk. This requires, on an urgent basis, the joint apex body led by finance ministers and central bank governors,” Khan said in an interview.
Islamic finance, which follows religious principles such as ban on interest payments and pure monetary speculation, claims to be more stable and less risky than conventional finance.
But the industry’s growth, to over $2tn in assets globally, has been fragmented and banks and companies operate in line with widely differing judgments by Islamic scholars in different countries.
Khan, who worked for the research arm of the Jeddah-based Islamic Development Bank for 25 years, argues this fragmentation creates risks in five areas and that the risks are growing.
One area is excessive leverage and credit creation, since four widely used Islamic financing tools lack a strong link to real economic activity, said Khan.
These include a buy-sellback mechanism known as tawarruq and another known as bai al dayn, which some scholars view as the sale of debt, a practice disallowed under Islamic law.
Trading on expectations through Shariah-compliant profit rate swaps, which replicate conventional interest rate swaps, could increase financial instability, Khan added. A third area is the unstable nature of Islamic bank deposits, which are based on profit-sharing mechanisms. These need additional capital preservation reserves and greater regulatory oversight, Khan argued.
Financial safety nets for Islamic banks are in the early stages of development in countries such as Malaysia and Qatar, and absent altogether in other countries, said Khan.
A fifth risk is the spread of opaque financial products due to a disconnect between academic scholars and those who sit on the boards of Islamic banks and service providers, he said.
It is not clear that national regulators and industry bodies around the world would be willing to cede authority to the kind of body envisaged by Khan.
But a possible precedent does exist in conventional finance—the Basel-based Financial Stability Board, a group of central banks, finance ministries and other bodies which monitors and makes recommendations for the global financial system.
Originally published on www.gulf-times.com