Dubai’s financial watchdog has warned that the burgeoning Islamic finance industry is in need of tighter regulation if it is to avoid the problems encountered by conventional financial markets, such as the sub-prime crisis and ensuing credit crunch.
“When you’re caught up in the euphoria of growth, sometimes standards slide,” Michael Zamorski, the Dubai Financial Services Authority's (DFSA) managing director for supervision told newswire Reuters at an Islamic finance forum on August 11.
“Whenever you have a fast-growing industry segment, they need to make sure that their human capital and the infrastructure are sufficient to ensure that the activities are conducted prudently,” he added.
The principles of Islamic financing forbid speculative transactions and require all deals to be based on underlying assets. Thus the global Islamic finance industry, worth $900 billion [USD], has been touted as a safe haven while conventional markets falter. Demand for assets that are compliant with Islamic Shari’a law has soared, as record energy prices fuel a boom in Middle East petro-dollars and the reaction to the Sept. 11 terrorist attacks has generated suspicion among some Muslims towards the West, the newswire said.
Meanwhile, an Aug. 12 report by credit ratings agency Moody’s Investors Service concluded that Gulf Arab governments are likely to take larger stakes in Islamic finance institutions (IFI’s) due to the increasing demand for Shari'a-compliant products and services.
“It is as if governments do not want to see the Islamic banking industry over-dominated by the private sector, in order to keep the whole thing under control,” the report stated. “If governments have an increasing share of ownership in IFI's, the risk of consumers perceiving an IFI as insufficiently compliant with Shari'a is somewhat mitigated.”
According to Moody’s analysts, the Islamic finance industry could one day be worth as much as $4 trillion.
“We believe that overall the Islamic financial industry has a bright future,” the report noted. “There's an indirect but powerful link between the Islamic financial industry and the performance of the oil market. So long as oil remains expensive […] Islamic banking and the
Governments in the United Arab Emirates, Qatar and Saudi Arabia have set up new Islamic banks to comply with Islamic law.
Last year, Dubai opened Noor Islamic Bank, owned in equal shares by the Dubai government and U.A.E. President Sheikh Khalifa Bin Zayed Al Nahyan. The new entity aims at becoming the world’s largest Islamic bank within five years.
This year, Abu Dhabi launched Al Hilal Bank, while the northern emirate of Ajman established Ajman Bank to satisfy growing demand for Islamic retail products.
Saudi Arabia’s Alinma Bank and Qatar’s Masraf Al Rayan also count the U.A.E. government as a major shareholder — a strategy that should help the Shari’a lenders move into new markets, the report concluded.