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'Inherent risks in cross-border Islamic transactions'

Publication Date : 21-09-2012


While Islamic financial cross-border transactions are fast gaining popularity, they also face a set of inherent risks and challenges, according to Dubai-based Fajr Capital Ltd’s Chief Executive Officer Iqbal Khan.

Iqbal, who is the second recipient of the Royal Award for Islamic Finance, said among the challenges were the variation in regulatory frameworks while history and market dynamics created some distortion in cross-border transaction.

“Cross-border transactions plays an increasingly significant role in the Organisation of Islamic Cooperation (OIC) economies. Despite showing an upward trend, intra-OIC merchandise trade growth is not as rapid as the growth in Islamic finance itself,” Iqbal said at a discussion at the Global Islamic Finance Forum 2012.

The high level discussions on regulatory strategies in an environment of increased cross-border Islamic financial activities was moderated by Bank Negara assistant governor Bakarudin Ishak.

Other panellists included Islamic Financial Services Board (IFSB) assistant secretary-general Abdullah Haron, UK Islamic Finance Secretariat chair of the working group Richard Thomas, PIMCO Asia managing director Brian P. Baker and Perbadanan Insurans Deposit Malaysia (PIDM) chief operating officer Md Khairuddin Arshad.

Based on a recent survey done by IFSB, Abdullah said the bulk of its members were in the process of implementing international standards. He explained that there was no enforcement in adopting the international standards now.

IFSB serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance.

IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with syariah (the moral code and religious law of Islam) principles, and recommend them for adoption.

PIDM’s Khairuddin pointed out that an effective deposit insurance system would promote stability of domestic, regional and global financial system by building public confidence. He added that the effective insurance system would also motivates more foreign banks to conduct cross-border banking transaction.

Moreover, Khairuddin said Islamic deposit insurance system could play the same role of conventional counterpart effectively but global development was still lagging. So far, he said only a limited number of country had an Islamic deposit insurance system in place.

In a separate session, Andrew Sheng Len Tao, president of Fung Global Institute, gave a speech on Navigating Islamic Finance in an Era of Increasing Internationalisation.

In his speech, he pointed out some weaknesses and advantages of the stock markets. He said a well functioning Islamic stock market was important while conventional stock markets had its drawbacks.

Sheng said there was a need to look at current weaknesses of conventional stock market to help design a better Islamic stock market if it was to be set up. Also needed to be considered was how important the stock market would be in helping managing the economy.

He also cited the example of the listing of Facebook saying the people who brought the social media company for listing made money but people who invested in Facebook was making a loss.


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