Sharia principles and asset-backed business model of the Islamic finance has largely shielded the Islamic financial institutions from the effects of the global financial crisis, a senior official at the World Bank said.
“Sharia principles of risk-sharing and asset-backing for transactions, as well as the prohibition of speculation gave Islamic financial institutions inherent strength which shielded them from the worst effects of the recent global financial crisis,” James Adams, Vice President, East Asia and Pacific Region, World Bank in a statement said.
Abayomi Alawode Lead Financial Sector Specialist, East Asia and Pacific Region at the World Bank, who delivered speech on Adams behalf during the opening session of the two day AAOIFI–World Bank annual conference on Islamic banking and finance said that in the post crisis era there has been growing interest in Islamic finance as a form of financial intermediation that can foster financial stability.
“”Global Sharia-compliant financial assets currently exceed $1 trillion and continue to expand at about 10% annually. These are impressive numbers, considering that not long ago, Islamic finance was seen as a niche market segment. Today, in addition to the sizeable Islamic finance industries in majority-Muslim countries, there is considerable and growing interest in this area from non-Muslim countries such as the United Kingdom and Luxembourg. This shows that Islamic finance has indeed come of age and has entered into the mainstream of global finance,” he said.
“While several conventional financial institutions imploded, undermined by their dependence on high leverage and use of complex derivates to transfer risk, Sharia-compliant financial institutions were not exposed to speculative sub-prime and toxic assets which devastated their conventional counterparts,” he said. “We at the World Bank are intrigued by these differences and the implications for financial stability. We are keen to work with our partners in the Islamic finance industry to investigate further how these lessons could be distilled and deployed towards building stable and resilient financial systems around the world,” he added.
However, he said, this does not mean that everything is fine with the Islamic finance industry and any form of complacency would be dangerous.
“In spite of the collective resilience of the Islamic finance industry, several individual financial institutions were threatened with failure during the turmoil and indeed there were defaults on some sukuk as a result of the real sector effects of the crisis. In addition, given that the industry itself is relatively young when compared to the overall financial markets, it has yet to be fully tested in many areas, including in the area of institutional failures. As such, constant vigilance is required to ensure that these institutions remain robust and resilient,” added.
“There are also some long-standing challenges for the industry, including improving liquidity management frameworks, strengthening corporate governance, clarifying the legal underpinnings of Islamic financial institutions and the lack of standardized documents and structures for contracts. The shortage of skilled and experienced professionals also requires attention,” he explained
“All these issues pose tangible risks to the sustainable development of the industry and need to be addressed effectively if Islamic finance is to attain its true potential. Conferences such as this one are therefore important for debating some of these issues and assessing various options for addressing them.
Confronting these challenges is critical, given that the Islamic finance industry continues to grow rapidly,” he added.
At the World Bank, he assured, we have a solid and unwavering commitment to playing a positive role in the industry’s growth and development.