UAE- Islamic finance gets IMF backing

(MENAFN- Khaleej Times) The Islamic banking industry is set to flourish further even in non-conventional markets as the International Monetary Fund (IMF) approved a plan to incorporate Islamic finance into its financial sector assessments of select countries starting from January 1, 2019 to improve regulation in the growing sector.

Under a proposal by the IMF's executive board, guidance issued by the Malaysia-based Islamic Financial Services Board (IFSB) would be incorporated into IMF assessments to address the regulation and supervision of Islamic banks. It means the fund, which traditionally focuses on conventional banking, now also accepts Islamic financial principles to become a globally-accepted system parallel to the conventional interest-based economy.

"This is a good move by the IMF and in my opinion it will bring lot of stability to the entire banking system" said Saad Maniar, senior partner at Crowe Horwath UAE.

According to the UAE Ministry of Economy and the Dubai Islamic Economy Development Centre, Shariah-compliant assets worldwide could reach an estimated $3.3 trillion by 2021. The UAE has expanded its role as one of the leading hubs for Islamic finance, an alternative way of banking and insurance based on Islamic law, or Shariah, which prohibits interest payments and pure monetary speculation.

"Customers' trust in Islamic banking will increase exponentially once the sector's assets reach $3.3 trillion by 2021 as predicted," Sultan bin Saeed Al Mansouri, UAE Minister of Economy and chairman of Dubai Islamic Economy Development Centre, said recently.

Growing industry

Islamic finance is estimated to have over $2 trillion of assets globally and is offered in over 60 countries, according to the IMF. The banking sector accounts for 85 per cent of global Islamic financial assets and the industry has become systemically important in 13 jurisdictions across the globe.

The latest PwC study indicates that global Islamic finance assets increased from $2 trillion in 2016 to $2.6 trillion in 2017. Financial experts and analysts say the Islamic finance market registered a strong 13-15 per cent growth last year and it is expected to cross the $3 trillion mark by 2020 due to strong performance in countries such as the UAE, Saudi Arabia, Malaysia, Indonesia and Pakistan.

John Iossifidis, CEO of Noor Bank, said the endorsement in the latest note from the IMF underscores the importance and recognition of the growth of Islamic financing globally.

"The fact that the IMF board recognises that Islamic banks can aid in promoting financial inclusion and deepening financial markets demonstrates that this alternative, and I would add ethical, form of financing now has critical mass. By adopting these principles the IMF is recognising that Islamic banks require specific regulations tailored to our sector. The fact that the IFSB worked with the Basel Committee to develop the regulations will ensure consistency across financial markets while recognising the unique nature of Islamic banks," he said.

Stability in Islamic banking

The IMF has also released a working paper - 'The Core Principles for Islamic Finance Regulations and Assessment Methodology' (CPIFR) - in support of its decision to promote financial stability in countries with Islamic banking.

"The Islamic finance sector continues to grow and evolve in size and complexity, with Islamic banking offered in more than 60 countries. The growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting 'unbanked' populations that have not participated in the financial system," according to the IMF statement.

Anita Yadav, head of fixed income research at Emirates NBD, said the core purpose of oversight and supervision of banking systems and banks is to ensure safety and stability of lenders.

"Adoption of the CPIFR will assist in improvising the existing prudential and regulatory framework for the Islamic banking industry and will also assist in harmonizing the standards adopted by various banking supervision boards across various countries," she said.

Iossifidis said the UAE has taken a lead to promote Islamic banking by establishing a Higher Shariah Authority. "Here in the UAE, we have been a step ahead in creating a Higher Shariah Authority, which is deliberating on the creation of a harmonised Shariah governance framework as well as the possibility of adopting AAOIFI [Accounting and Auditing Organization for Islamic Financial Institutions] and IFSB standards for Shariah-compliance and prudential standards, respectively," he said.

Standard & Poor's also pointed out in its latest report that Islamic banks in the GCC region will continue to expand at a marginally faster rate in 2018-19.

"We expect Islamic banks' financing growth will reach 4-5 per cent, supported by strategic initiatives such as Expo 2020 Dubai, Saudi Vision 2030, the 2022 Fifa World Cup in Qatar and higher government spending in led by the Kuwait 2035 Vision, the country's national development plan," said Mohamed Damak, global head of Islamic finance at S & P Global Ratings.

"While overall lending growth slowed down in 2013-17, Islamic banks in our sample saw more rapid growth of 6.9 per cent than the 3.7 per cent we saw for conventional banks," he added.

In the UAE, Islamic banks recorded a 10.9 per cent compound annual growth rate (CAGR) in assets during 2014-17 compared to 4.4 per cent at conventional banks during the same period, according to the Central Bank of the UAE. Islamic lenders also outperformed conventional peers in terms of gross credit demand by posting 10.2 per cent growth in 2014-17 against 3.8 per cent by conventional banks during the same period.

In terms of deposits, Islamic banks in the UAE also performed better than conventional banks, registering a CAGR growth of 10.5 per cent during 2014-17 compared to only 3 per cent by conventional banks during the same period. Islamic banks account for 23.6 per cent of total banks' deposits.

"Islamic banking represents circa 20 per cent of the total banking sector in the UAE. There are stand-alone Islamic banks as well as conventional banks that have separate Islamic banking businesses. Adoption of the CPIFR will greatly assist in setting clear standards for the Islamic banks to follow and in turn assist in ensuring they operate within manageable risk limits," Yadav said.



Khaleej Times

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