Sharia-compliant reforms 'vital for banking sector'

MANAMA: New Islamic banking products under discussion at a key meeting will be designed with Sharia compliancy as their top priority and not merely imitate tools of conventional banking, said a Central Bank of Bahrain (CBB) top official yesterday.

CBB banking supervision executive director Khalid Hamad was speaking to GDN on the sidelines of a key summit of the heads of Bahrain's Islamic banking industry, where experts met to discuss the creation of new products to strengthen the sector.

Among the topics to be debated at the technical workshop held under the auspices of the International Islamic Financial Market (IIFM) was the creation of the first ever Islamic repo law.

Repos, or repurchase agreements, are a controversial subject within the industry, with some Sharia scholars viewing the transactions, which allow investors to borrow money by selling securities and pledging to buy them back at a higher price at a specified time in the future, as in contravention of Islamic principles regarding interest.

However, Mr Hamad, who is also currently acting chairman of IIFM, dispelled any notion that collaboration with the London-based International Capital Market Association (ICMA) would divert local institutions from the issue of Sharia compliance.

"There has been a lot of talk in the past, some of which is still ongoing now, regarding Islamic banks and that they are basically taking conventional products and 'Islamising' them," he said.

"Now our belief is contrary to this. We are not, and our relationship now with ICMA through our work at IIFM is not about that.

"We really do not 'Islamise' transactions.

"We have invited the Islamic banks in Bahrain together so that we share with them our thoughts in terms of what needs to be developed.

"As you know we can not develop things without looking first at the market and what the market needs so we are today having this dialogue, we are bringing people from ICMA, and our people from the IIFM to present to the banks, CEOs and deputies, what from our perspective are the issues we can work on in association with ICMA to assist the market in developing products."

He identified two main areas of discussion - the creation of a Sharia-compliant repo agreement and a new risk management system for Islamic products such as sukuk.

Mr Hamad said he hoped the meeting would result in a consensus to adopt master agreement legislation making the new products industry standard.

"A master agreement means all the banks will be able to reduce time in negotiating legal agreements with other parties, with brokers, with stock exchanges - and it will be a sort of industry-accepted document," he said.

"It also will reduce costs on the industry because the IIFM will bear the cost. The banks will get a document they can use going forward."

With regard to an Islamic repo agreement, he stressed that a new product could give banks a valued product to manage their liquidity.

Tapping the expertise of the London-based ICMA should not be viewed with suspicion, added Mr Hamad, but instead a valuable chance to learn from a more established industry.

"The conventional financial system has been there for ages, and has been tested through several crises from A to Z," he said.

"To develop a financial system there are main pillars that have to be there - from accounting, to practice, to standards, to regulations, capital markets, money markets, rating methodology - all of those are there and tested.

"We are not reinventing the wheel as the landscape of the Islamic financial system has already been structured."

The importance of the new products was underlined by National Bank of Kuwait general manager Ali Fardan.

"What we need is to have a similar repo transaction to the conventional market, but it must comply with Islamic principles and I think that is achievable.

"We are studying the whole issue and I think very soon we will come to the market hopefully with a new product which helps Islamic banks to deal with their liquidity requirements."

Mr Fardan said he did not expect to complete the process after a mere one or two meetings.

"This is going to be achievable but it will need time," he said. "But we are devoting our time, as bankers, as regulators, to achieve this project."

Reference:: Sharia-compliant reforms 'vital for banking sector'

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