Speech by His Excellency the Governor of SAMA
to
“Symposium on Islamic Banking Prudential
Standards”
Institute of Banking, Riyadh, 15 January
2007G.
Ladies and Gentlemen,
It gives me a great pleasure to address this
honorable and distinguished attendance at this important symposium on “Islamic
Banking Prudential Standards” organized by the Institute of Banking (IOB) in
cooperation with the Islamic Financial Services Board (IFSB).
The issue of Shari’a (Islamic Law) compliant
banking is increasingly drawing attention of those concerned with financial
stability, including international financial institutions such as the IMF, World
Bank (WB), development banks, Basel Committee on Banking Supervision as well as
supervisory authorities in the countries where Islamic banks operate. This is
the result of rapid growth in the volume and scope of Islamic services offered
in many countries. Those entities have shown a great interest in the growth and
expansion of finance business compliant with the principle of avoiding interest
and its impact and implications with respect to world markets and the global
economic system.
Currently, Shari’a compliant banking
transactions have spread in most countries of the world through banks that
totally comply with Shari’a or through Shari’a compliant windows offering all
services, investment and commercial activities, leasing, investment funds and
joint liability products.
The Kingdom has been a forerunner country in
supporting and encouraging Saudi banks to offer such products required by the
Saudi market. All Saudi banks now provide a range of products that are compliant
with Shari’a requirements and with financial engineering specifications of the
highest levels under the supervision of well-reputed Shari’a committees and top
class financial professionals.
In the context of supporting such efforts,
SAMA’s IOB has offered many programs, courses and symposia in the area of
developing, marketing and supervising Shari’a compliant products. The number of
bankers benefiting from those programs stood at 6,300 who participated in 374
programs during the last seven years. These endeavors have considerably helped
in developing Islamic banking in Saudi Arabia without undermining compliance
with Islamic Shari’a or the technical flexibility needed by an emerging and
dynamic market.
Dear Audience,
It is very important to mention that the
industry of Islamic financial services should be completely integrated into the
global financial markets while maintaining at the same time its distinguished
nature and unique services. The industry should also be subject to the same
level of supervisory control as other financial institutions. Any breach of
standards, practices or application by Islamic banks will not only be an
obstacle to their services and products, but it will also serve as a hindrance
to accepting their services and products by international financial markets.
Consolidating a bank’s financial data with those of all its subsidiaries and
branches is another principle that must be applicable to all banks, and such
principle is necessary for ensuring consolidated and comprehensive supervision
by the supervisory authorities in the bank’s home country.
Central banks' governors in Islamic
countries, members of the Islamic Development Bank realized the importance of
such consolidation 25 years ago when a technical committee was formed, including
a number of governors and specialists, of which I was honored to be the
chairman, to consider the needs of Shari'a compliant banking services. The most
important recommendation was that Islamic banks must be subject to the same
supervisory rules and requirements as those that govern conventional banks, with
the necessary flexibility, taking into account their specific work methods and
products so as not to isolate these banks from global financial markets.
Encouraging Islamic banking
institutions to integrate into global markets will push them forward to compete
with all other financial institutions, stimulating them to innovate to meet the
needs of corporate and individual customers, expand their scope and base of
work, and not to be tied to a specified category of customers or specific
markets. This will help them adapt with the requirements of the global financial
system, provide them with necessary instruments, helping them develop and
reinforce their structures, and facilitate their spread.
Dear brothers
Banking business, in all its types
and forms, is not free from risks that pose a challenge to banks and supervisory
authorities. In this context, Islamic banks, like their conventional
counterparts, are financial institutions providing services to depositors and
investors, on the one hand, and offer financing to companies, public sector and
individuals, on the other. Therefore, they are subject to many risks that are
similar to those confronted by conventional banks. In addition, Shari'a
compliant banking has its own risks. In principle, there is a range of various
activities through which Islamic banks can work in different ways that enable
them to provide funds. These activities are adapted to meet the principles
governing Islamic banking business, the most important of which is the principle
of risk sharing. Therefore, there is an urgent need to identify, measure,
manage, monitor and control such potential risks and mitigate them within the
capacity and capital adequacy of the relevant bank.
The most important challenges
confronting Islamic banks are risks arising from financing formulas and Shari'a
compliant banking, especially investment risks, method of applying "Basel II"
proposals, capital market and financial derivatives risks. In addition, Islamic
banks may bear a wide range of risks that differ, in nature, from those borne by
commercial banks.
In this connection, it is necessary
to emphasize that the role entrusted to the supervisory authorities is to pursue
a comprehensive control method based on risk assessment process and not to make
any discrimination in a way that may suggest that Shari'a compliant banks are
being rated differently or confronting larger risks.
Corporate governance, risk
management, transparency, disclosure, and internal control requirements in
Islamic financial services industry should always be developed, and adjusted to
meet the needs specified for Islamic banks, especially that an important part of
the work of these banks is based on impression and reputation of the nature of
their work. Therefore, these banks should be aware of the role entrusted to
them, especially the ethical one.
The nature of risks faced by Islamic
banks may raise specific issues in terms of assets and inventory assessment,
investment costs, regular income and recognition of losses, adequacy of
guarantees and others. We must emphasize here the importance of continued
development of mechanisms to cover such risks. This underlines the importance of
integration into global financial markets, encouragement of competition, and
provision of a proper climate for on-going innovation so that Islamic banks can
consolidate their positions in all markets and boost their ability to provide
products for all segments of customers.
On the other hand, a controversy is sometimes
raised and comparisons are made between Islamic and conventional banks in terms
of risk degree, exposure to insolvency, and the argument ensuing concerning
capital adequacy. However, the important point is the awareness and
understanding the nature of risks, development of mechanisms to cover such
risks, and the ability to compete in markets and meet the needs of customers.
Perhaps it is imperative here to emphasize that it is important for Islamic
banks to provide all information about their activities and financial statements
with full transparency, especially that they bear moral responsibility. This
would enhance their credibility, contribute to their good reputation to be
accepted on a broader range, and remove any false beliefs concerning their
activities.
Dear brothers,
A number of central banks and supervisory
authorities have recognized the nature of risks confronted by Islamic banks and
pursued a supervisory approach based on measurement of risks. Thus, they have
developed appropriate mechanisms for banking supervision depending on the type
of risks. They have also realized the need for international cooperation to
develop standards that could form the basis of a strong structure for Islamic
banking.
The increasing global interest in Islamic
banking, in recent years, is attributable to the rapid growth of this type of
activity in terms of size, scope and significance both in Islamic countries and
other parts of the world. Islamic banking has spread widely in more than
twenty-five countries in Asia and Africa. It has also emerged in many financial
centers in Europe and North America to the extent that major international banks
and specialized financial institutions have started to offer Shari’a-compliant
products to meet the needs of a wide spectrum of customers in their markets and
those of Islamic countries.
Dear brothers,
You all know the efforts made by Basel Committee
to issue various standards governing conventional banking in the area of capital
adequacy, corporate governance, and the principles of compliance, and others.
These and other standards have helped create an appropriate environment for
banking business which supports competition.
On the other hand, a number of central banks in
a number of Islamic countries, including SAMA, have established the Islamic
Financial Services Board (IFSB) to promote establishment and development of
Shari’a compliant financial services industry, characterized by prudence and
transparency, through the adoption of existing or new international standards
compatible with Islamic banking principles and methods.
Since its establishment in November 2002, the
Board has made great efforts in issuing international standards governing
Islamic banking business through a number of committees and work teams in the
membership of which SAMA participates effectively. Such standards will help
setting up a strong structure to create robust banking entities able to compete
in the international markets. The Board also makes great efforts in organizing
conferences and workshops to promote awareness of the nature of Islamic banking.
I can not, on this occasion, but thank the Board's members.
Dear audience
Saudi Arabian Monetary Agency exerts
persevering efforts to promote awareness and emphasize the importance of
applying international standards that help manage risks, enhance competition and
create strong entities. Therefore, this symposium is the first of its kind on
Islamic Financial Services Board's standards which complement the guidelines of
Basel II. The symposium aims specifically at providing a clear understanding of
Islamic Financial Services Board's standards with regard to capital adequacy,
risks management , supervisory review process , corporate governance systems
, transparency and market discipline , which constitute fundamental bases to
ensure soundness and stability of Islamic banking services. Therefore, it is
expected that this symposium will facilitate the application of these standards
by all relevant parties.
Finally, I would like to thank the
Islamic Financial Services Board, especially its General Secretariat, Dr.
Refa'at Ahmad Abdulkareem and his colleagues for their great efforts. I also
would like to thank the colleagues in the Institute of Banking for organizing
this symposium as a continuation of the Institute's efforts and role. I wish the
symposium all success.
Thank
you for your listening.
