Islamic Finance Leaders Identify Regulatory Shortcomings
Thursday, September 30, 2010

The lack of a clear regulatory framework for the Islamic finance industry has been identified as a key concern by the Middle East's Islamic finance leaders in a new survey.

The release of the first Middle East Islamic Finance Leaders survey from Deloitte reveals insight from Islamic Finance leaders on a wide range of pressing issues and prevailing trends within five key areas of regulatory and Sharia’a compliance, risk management, corporate structuring and capital management strategy, investment and capital markets, and human capital management.

“As the first of its kind in the Middle East, this survey provides a truly regional picture of market sentiment and how Islamic Finance leaders perceive the current economic slowdown, business performance, and the way forward,” said Dr Hatim El-Tahir, Director of Deloitte’s Islamic Finance Knowledge Center in Bahrain.

“Although Islamic Finance is expected to continue its growth path, the development of the industry’s infrastructure and regulatory framework is of high concern to most executives who took part in this survey,” added El Tahir.

According to Deloitte, four key themes emerged from the survey, including the need for: new standards for accounting and risk management; best practices in financial reporting; diversification of investment strategies; strategies to tackle the lack of skilled Islamic finance professionals.

In other key findings, only 35% of the survey's respondents believe that Islamic banks are adequately capitalized.

The majority (80%) expect levels of corporate structuring and organizational change to increase while two out of three expect a change in the existing business models of Islamic Finance in the foreseeable future.

Convergence of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) with International Financial Reporting Standards (IFRS) was supported by 79% of those surveyed.

Almost three quarters (64%) agree that Islamic Finance Institutions are lagging behind on the implementation of risk management systems.

According to Moody's Investors Service, the Islamic finance industry's total assets scaled new heights in 2009, rising to just under USD1 trillion despite the gloomy economic landscape. However, the ratings agency urged the industry to continue to innovate, if Islamic finance is to really thrive.

Moody's estimates that the market's potential is worth at least USD5 trillion and the industry is continuing to expand globally. But a lack of sophistication in the industry so far, such as in the development of hedging products and mechanisms, may hold back future growth.