Islamic banking institutions to get a major boost in KL
Veeramalla Anjaiah, The Jakarta Post, Jakarta
The Islamic banking sector will get a major boost next week with the launch of an international standard board when central banks of Muslim countries sign comprehensive agreements at a two-day meeting in Kuala Lumpur.
Islamic banking leaders see the establishment of the Islamic Financial Services Board (IFSB) as a recognition of the growing significance of the global Islamic financial services sector that has over 200 institutions with assets of about US$170 billion and yearly growth of 15 percent.
The IFSB, which would serve as an avenue to develop uniform interpretation of sharia laws for processes, financing modes and regulatory standards, will be inaugurated by Malaysian Prime Minister Mahathir Mohamad on Sunday.
The board will set and disseminate standards and core principles as well as adapt existing international standards for supervision and regulation of the Islamic financial services sector in line with the sharia principles. Another main duty of the IFSB will be to "liaise and cooperate with other standard setters in the areas of monetary and financial stability."
Bank Indonesia Governor Syahril Sabirin will lead the Indonesian delegation at the IFSB inauguration. Bank Syariah Mandiri's President Noordin Hasibuan and director Iskander Z. Rangkuti will also attend the Kuala Lumpur meeting.
Since the standards and the core principles set by the IFSB are not obligatory for the member countries, it would become a major challenge for the board. And several member countries including Indonesia, the world's most populous Muslim country, do not have a comprehensive Islamic banking law. Islamic banks are covered under Banking Law No. 10/1998 and Banking Law No. 23/1999 regarding Bank Indonesia.
Islamic bankers and analysts welcomed the establishment of the IFSB as a positive step to further strengthen the industry.
"It would be a very good thing for the embryonic Islamic banking sector in Indonesia," Dhani Gunawan Idat, a senior researcher at Bank Indonesia's Syariah Banking Bureau, told The Jakarta Post.
Indonesia's first Islamic bank, PT Bank Muamalat Indonesia, was launched in 1991 and began its operations in 1992. After the establishment of Bank Syariah Mandiri in 1999, several conventional banks including Bank BNI, Bank IFI and Bank Jabar also joined the race by opening sharia branches in recent years. There are now 80 regional sharia banks operating in Indonesia.
Indonesian sharia banks, whose assets constitute 0.3 percent (until August 2002) of the total national banking assets, have been growing steadily. Their share was 0.2 percent in 2001
It took almost 20 years for neighboring Malaysia, where the IFSB's headquarters is to be based, to earn the present 8.8 percent market share for the Islamic banking sector.
With the launching of the IFSB, Islamic banks are expected to gain confidence to compete the conventional banks locally as well as globally.
Sharia or Islamic banks are completely different from the regular banks. Islamic banks neither offer, nor earn, interest on deposits. Because Islam prohibits interest, which is viewed pejoratively as "making money from money."
But they follow a "profit sharing system" principle. All the investments must be asset-based. The products of Islamic financial institutes are highly competitive and cost saving.
Even non-Muslims can invest in the Islamic banks, says A. Riawan Amin, president of the country's largest Islamic bank, Bank Muamalat.
After two years of an extensive consultative process, the banking regulators from Indonesia, Saudi Arabia, Bahrain, Iran, Kuwait, Lebanon, Malaysia, Pakistan, Sudan, United Arab Emirates and the Islamic Development Bank, the Accounting and Auditing Organization for Islamic Financial Institutions and the International Monetary Fund have succeeded in setting up the IFSB, which will be chaired by Malaysian central bank governor Zeti Akhtar Aziz.