Keynote Speech by:
Dr. Joseph Torbey
IFSB Summit
16-18 May, 2006
It is my pleasure and honour to be invited to speak infront of this distinguished audience at this summit organized by the Islamic Financial Services Board on the Islamic financial services industry. I’m also glad to chair this panel designed for the discussion of the legal infrastructure for Islamic finance. Before I leave the floor for our outstanding speakers, I will introduce this panel with a short expose on Islamic finance and its legal framework.
Islamic banking represents a radical departure from conventional banking; it embodies a number of interesting features since equity participation, risk and profit-and-loss sharing arrangements form the basis of Islamic banking. Interest in Islamic banking has grown considerably during the last decade. The main issues of concern are the regulatory and legal frameworks, the viability of interest-free banking, and the assessment of its performance and future. In a world where conventional interest-based finance is the dominant framework, Islamic banking is fastly growing, but is also facing many challenges that must be addressed.
An Islamic bank is based on the Islamic faith and must stay within the limits of Islamic Law, as we know, or the sharia in all of its actions and deeds. The original meaning of the Arabic word sharia was 'the way to the source of life' and it is now used to refer to legal system in keeping with the code of behaviour called for by the Holly Qur'an. Four rules govern investment behaviour:
a. the absence of interest-based (riba) transactions;
b. the avoidance of economic activities involving speculation (ghirar);
c. the introduction of an Islamic tax, zakat;
d. the discouragement of the production of goods and services which contradict the value pattern of Islamic (haram).
For a long time, the legal aspects of Islamic financing have received comparatively little attention in the non-Muslim world. But as the business grows, we expect to see, the increasing standardization of documentation and terms, at least so far as the terms of international transactions are concerned. Two main issues are to be addressed: the first has to do with regulatory law, and the second issue relates to the respective roles of the Shariah and of secular law in the context of financial transactions.
One of the pre-conditions to sustain the continuous growth of Islamic banking is the existence of a comprehensive legal infrastructure to seek any legal redress arising from Islamic financial transactions. A sufficient number of competent lawyers and judges equipped with sound knowledge and expertise in both Shariah and civil laws is needed to handle legal matters on Islamic financial contracts to promote confidence amongst the industry practitioners and customers. In this regard, steps must be taken to:
● Form a committee to establish a Shariah commercial court dedicated to deal with legal matters on Islamic banking. In the interim, an Islamic banking tribunal will be formed to serve as a foundation for the ultimate establishment of the proposed court; and
● Design dedicated awareness and training programs for judges and lawyers on Islamic banking, to be conducted by the industry-owned research and training institute in consultation with the Judiciary council.
Concerted efforts must be directed to create a separate and viable platform for Islamic banking to function effectively in parallel with conventional banking. The legal, regulatory and Shariah framework of Islamic banking must be strengthened further through the review of the existing laws and guidelines governing the industry. Code of ethics will be one of the core determinants in disciplining the industry with less emphasis on central banks’ intervention.
The impetus for future growth has to emanate from a separate regulatory platform in order for the industry to break away into further development and focus on its own set of banking principles. As such, emphasis should be directed towards:
● Establishing a global Islamic Banking Act to take into account the distinct characteristics of Islamic banking while not compromising the regulatory and prudential aspects. This Act must create a conducive environment for Islamic banks to move towards a supervised market approach framework.
● Fine-tuning the existing banking laws to accommodate the unique characteristics of Islamic banking. Islamic banks must be further regulated to ensure that the risk management profile of the banking operations are adequately addressed and monitored;
● Developing a regulatory framework for Islamic banking by introducing a separate capital adequacy, statutory reserve and liquidity requirement for Islamic banks;
● Harmonizing the Shariah opinions on Islamic banking and finance to enhance efficiency and promote market development.
To conclude:
Effective Islamic legal framework requires involvement of all stakeholders - the government, the industry associations, the shareholders, the directors, the management and other persons relevant to the business such as auditors, accountants, lawyers and Shariah advisors - to responsibly complement each other in strengthening the Islamic banking practices. At the international level, the IFSB and other standard setting bodies have an important role to harmonize the practices and complete the framework by setting the broad framework for international application. It is with this integrated and cumulative approach, that strong and effective Islamic banking regulatory framework will be successfully implemented. Each one of us regardless of our position, as regulators or bankers, is accountable.
Thank you for your kind attention.
