ISLAMIC FINANCE CAN ALSO FACE SYSTEMIC FAILURE & REPUTATION RISKS, SAYS

KUALA LUMPUR, Sept 29 (Bernama) -- Islamic finance could also face a
systemic failure and reputation risk unless there is a unified and dynamic
regulatory framework applied not only domestically but also globally, warned
an economist and former International Monetary Fund (IMF) executive director Dr
Abbas Mirakhor.

He brushed aside claims that Islamic Finance was the most regulated
financial sector as compared to the others.

" It's not true. We may have more regulatory standards but there is no
implementation of the standards in a unified manner and there is no organisation
that supervises the instruments," he said in his public lecture entitled: "
Strengthening The Islamic Finance System: Lessons From The Crisis," at the
Securities Commission here Tuesday.

Present at the lecture was the Crown Prince of the state of of Perak, Raja
Dr Nazrin Shah, and Securities Commission chairman Zarinah Anwar.

Mirakhor said currently every jurisdiction have their own Islamic
regulations while in some cases none, which gives the opportunity for regulatory
arbitrage and that people issue Islamic instruments which may be sub-par in
jurisdiction which are very weak or no regulations and therefore create risk for
the system.

Therefore, the regulatory challenge is far more serious within the framework
of Islamic Finance than in the conventional system.

" And because Islamic Finance is at a very infancy stage of development,
(when it fails) the reputation risk is very huge," he said.

He said some of the Syariah scholars now know very little about finance.

" And it seems it is becoming performable to put a stamp of approval so that
an instrument can be issued. You may or may not know there has been instruments
that has been in trouble but they all had their approval from Syariah scholars,"
he said.

Therefore, Mirakhor said that to ensure a decent chance of growth and
development, one has to make sure the regulations are unified and accepted by
all jurisdictions.

"So, we need to create a uniformed standardisation for Syariah products
and at the same time you need a uniformed, comprehensive and universal
regulatory system in place, which can have the authority of early warning when
it comes to weak instruments," he said.

However, the question is whether it should be done via an association of
Islamic banks or central banks that have Islamic Finance operating in its
jurisdiction.

Such arrangements are not difficult but it depends very much on the "will"
of the participants, said Mirakhor.

He said Malaysia has the most advanced regulatory system todate for Islamic
products and therefore it should take the lead towards the establishment of a
unified framework.

But whether Malaysia will be the "agency" or via some other new
organisation, it depends on the will of the authorities in Islamic or
non-Islamic countries where there are Islamic products being transacted.
-- BERNAMA