Islamic finance regulation should focus more broadly - officials

ISLAMIC FINANCE: Islamic banks need a different set of regulations from conventional banks as they face different risks. (Getty Images)

Regulators have to police Islamic financial institutions from a macro and systemic perspective rather than by focusing on single institutions if the sector is to grow, industry officials said on Thursday.

A broader approach is needed in part so that the once-niche Islamic financial sector that is now a $1 trillion industry can avoid the sort of financial storm that has swept through conventional banking during the credit crisis, said the secretary-general of the Islamic Financial Services Board, Rifaat Ahmed Abdel Karim.

The Islamic financial sector is facing a growing chorus of calls for more transparency and closer supervision to replace the current fragmented regulatory framework.

Governed by national authorities, and if they so choose by industry bodies, sharia banks are subject to a patchwork of commercial and religious rules that differ across jurisdictions.

"The trend in the past was to focus on regulating financial institutions individually, without sufficient attention to systemic risk and macro-level complications," Islamic Development Bank President Ahmad Mohamed Ali told an Islamic finance conference.

"Since Islamic principles address both macro and micro dimensions of economic activities, regulatory standards of the Islamic financial industry now need to reflect this comprehensive approach and translate these principles into an integrated stability framework."

Authorities have to scrutinise sharia banks using a broader approach for them to avoid a similar crisis that has hit conventional banks, Abdel Karim said.

"We don't see the whole picture," he said. "We need to see who's connected with what."

The board is an umbrella group for Islamic financial regulators.

Islamic banks need a different set of regulations from conventional banks as they face different risks, with these sharia institutions often partners in business ventures instead of lenders, bankers have said. (Reuters)

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