4th May, 2010
RIYADH: Islamic finance needs to establish an effective system-wide crisis management and harmonised regulatory framework, in order to keep up with new challenges in the industry.
In making the call, the Raja Muda Perak Raja Dr Nazrin Shah said Islamic finance, had very unique characteristics and risks that also required unique risk management solutions.
“To optimise its potential, there is a need to address current gaps and challenges in the Islamic financial system. In particular, Islamic finance requires the expansion of enabling infrastructures to support its efficient functioning,” he said, in his keynote address on Saturday in conjunction with the Malaysia International Islamic Financial Centre (MIFC) roadshow here.
Raja Nazrin, who is the MIFC Financial Ambassador, said the infrastructure needed would entail a robust regulatory and supervisory framework, adequate financial safety nets and an effective punitive and problem-resolution mechanism.
He said devising such solutions is complex and therefore, must be pursued collectively by Islamic finance experts and regulators.
“Regulators and market practitioners should work hand in hand to develop a deeper understanding of the behaviour of the market, the likely interactions between the Islamic and conventional systems and the effect of changes in macroeconomic policy on the two systems,” he explained.
Raja Nazrin said as competition in Islamic finance intensifies, there would be increased pressure for market participants to innovate, potentially testing the boundaries of Shariah-compliance.
He added that while continuing to offer new opportunities and portfolio diversification to investors, it would be good to have a clear and universally-agreed set of Shariah parameters, as a common reference for participants.
According to Raja Nazrin, these parameters should emphasise good risk management, strong governance practices, ethics and transparency as underpinning factors.
“This will ensure Islamic finance continues to offer genuine benefits to the global financial market instead of merely mimicking conventional finance,” he said, to some 80 businessmen from Saudi Arabia and Malaysia, who attended the luncheon talk organised by MIFC.
Addressing the emergence of ethical funds, Raja Nazrin said this move was a positive step in transforming the current financial system into one that is more accountable, and which makes investors more aware of their responsibilities in economic decision-making.
Citing the recent launch of a Christian index in Europe, he said this trend, however, should not be viewed as a new point of contention from a religious perspective as that will only serve to divide the world further.
Instead, he highlighted, it should be viewed as contributing to the betterment of the global financial system.
Meanwhile, on Malaysia and Saudi Arabia, he said both countries must continue to pursue the priorities crucial to making Islamic finance play a leading role in the economic development of both.
“By doing that, the two countries could capitalise on their potential by exploring new business ventures and tappping into each other’s strengths while at the same time, becoming the bridge between East and West Asia,” he added.