Muhammad Al-Jasser: Overview of the Islamic banking industry
Speech by Dr Muhammad Al-Jasser, Governor of the Saudi Arabian Monetary Agency, at
The Fifth Conference for Islamic Banks and Financial Institutions, hosted by the Central Bank
of Syria, Damascus, 15-16 March 2010.
* * *
In the Name of Allah, the Most Gracious, the Most Merciful
Let me first thank the Central Bank of Syria, the official sponsor of the Fifth Conference for
Islamic Banks and Financial Institutions, and, in particular, I would like to thank the Bank's
Governor, His Excellency Dr. Adeeb Mayalah.
Ladies and Gentlemen,
Islamic banking has grown widely in recent years and has extended to several international
financial centers, which invested in this field, reflecting an increasing interest in financial
Islamic products and services. Because of this interest, some of the international markets
indices such as "Dow Jones" and "FTSE" have been launching indices for Shari'ah-compliant
activities since 1999. According to the latest available data, the Islamic financial institutions'
assets exceeded $822 billion by end of 2009, and they are expected to exceed $1 trillion by
end of 2010. In addition, issuance of Islamic Sukuk has risen fourfold over the last four years,
exceeding $100 billion by end of 2009.
Islamic banks and financial institutions account for 15 percent of the Middle East top
30 banks' assets. There are more than 430 Islamic banks and financial institutions in more
than 75 countries and about 191 conventional banks have Islamic windows. By the end of
the third quarter of 2009, the total assets of Islamic investment funds were estimated at
about $ 27 billion, spread across 478 Islamic investment funds worldwide.
Dear audience
Islamic banking contributes to social and economic development through investment in
areas related to the real economy such as production of goods and services and commerce.
In addition, Islamic Banks and Institutions have proved their success in attracting savings,
fulfilling customer's needs and achieving their interests. Moreover, Islamic banking has made
great strides in boosting banking business by introducing innovated products and tools
and by adopting new financing forms such as Ijarah (leasing), Istisnaa and Salam, along with
Mudarabah (profit and loss sharing) and Musharakah (partnership). Furthermore, a variety of
Islamic Sukuk (Islamic bonds) has emerged, and some Islamic banks have started to
arrange for syndicated financing transactions in accordance with Islamic forms, and others
are managing Shari'ah-compliant investment funds. Every tool of the Islamic banking has its
own contractual nature and features, which differ from other tools in terms of risks,
guarantees and pricing.
Islamic banking services have not been confined to the activities mentioned earlier, but the
scope of their transactions has been extended to include other services such as: providing
joint finance, issuing banking bonds and opening letters of credit. Islamic institutions and
banks provide a variety of finance and insurance methods for enterprises, management of
financial portfolios, and Tawarruq assets (assets securitization). Moreover, Islamic
institutions and banks have played an effective role in supporting economic reforms and
privatization programs in countries where they work by purchasing shares in listed
companies and financing some private activities, thereby helping in supporting the basic
infrastructure and financing of housing projects for low and middle income people. They have
also contributed to supporting small and craft projects, and indirectly helped in creating many
job opportunities for citizens.
Ladies and Gentlemen,
The achievements of the Islamic banking industry over the last three decades have
necessitated the establishment of relevant institutions that support Islamic banking
such as: the Accounting and Auditing Organization for Islamic Institutions (AAOIFI) and the
Islamic Financial Services Board (IFSB). All these organizations aim at creating a sound
environment for collaboration and communication among Islamic banks and financial
institutions by introducing and applying International standards to improve the Islamic
banking industry and ensure its soundness.
Let me briefly talk about the necessary requirements to ensure the sustainability,
stability and soundness of Islamic banking. The Islamic Financial Services Board
(IFSB) plays an effective role in abiding by supervisory requirements for sustainability
through issuing supervisory and control standards for the Islamic banking system, based on
the best supervisory practices in line with Basel II standards, focused on: capital adequacy,
risk management, internal control, institutions management controls, transparency and
market discipline.
The IFSB has urged the Islamic institutions to follow specified procedures for assessing their
capital adequacy in terms of the nature of risks and pursue strategies to maintain their capital
at required levels. It has also required supervisors to review and assess internal assessment
measures of these institutions' capital adequacy and ensure their compliance with the
required capital level and take supervisory measures in case of non-compliance. In addition,
the Board has urged supervisory authorities to take prudential measures to prevent the
decrease of capital to lower than minimum level, and stipulate quick correcting measures in
case of such a decrease. Stress tests are considered one of the prudential measures that the
Islamic Financial Services Board (IFSB) is keen to emphasize, and it urges Islamic financial
institutions to apply them, including the assessment of prudential and control steps to reduce
qualitative and quantitative risks, apart from applying transparency and accounting disclosure
in financial reporting.
In the realm of coordination with the national supervisory authorities, the IFSB seeks to
enhance work in the area of consolidated and effective supervision and ensure the stability of
the Islamic financial system by abiding to best practices for risk management and
transparency. In this vein, the IFSB organizes conferences and symposiums for supervisory
authorities and those interested in this industry. The IFSB also endeavors diligently to work
with international and regional institutions, research centers and educational institutes to
promote this significant industry.
Dear audience,
In Saudi Arabia, we are aware of the importance of Shari'ah-compliant banking products
and services. The Saudi Arabia Monetary Agency (SAMA) encourages banks operating in
Saudi Arabia to meet market demands and provide those services. Currently, all banks
operating in Saudi Arabia provide Shari'ah-compliant services, and this activity is rapidly
growing. The size of this activity differs from one bank to another. Some banks only provide
Shari'ah-compliant products and services, and others provide such services and products
through some specific branches or units.
We, at SAMA, supervise and regulate Shar'iah-compliant activities in accordance with the
same practices applied to conventional commercial banking businesses. Hence, standards of
capital adequacy, liquidity, and other supervisory and monitoring requirements apply on
Shari'ah-compliant institutions and banks. SAMA, in cooperation with Saudi banks and
financial institutions, has deep-rooted international standards (such as those set forth in
Basel II and those prescribed by the IFSB) for risk management, corporate governance and
internal controls.
Dear audience,
There are many challenges posed to Islamic banking such as finding new and various
opportunities for development, innovation of new tools, boosting its human resources in all
fields including in risk and liquidity management, promoting costumer service level, improving
skills and expertise for promoting the understanding of Shari'ah teachings and applying them
in new banking and finance areas. In addition, it is appropriate for Islamic Financial
Institutions to increase efforts to train human resources scientifically to enhance their
capabilities and to conduct further studies to update Islamic services and products and
improve Islamic banking in the long run.
Moreover, it is necessary to use uniform accounting and auditing standards to ensure safety
and stability of Islamic banking. It is also encouraged that Islamic financial institutions merge
to increase their capital and have more liquidity to finance their investments. Finally, Islamic
financial institutions need to steer efforts towards good corporate governance, good risk
management, transparency, and financial disclosure.
I hope that the Islamic banking industry will achieve further prosperity and success in the
future. Thanks again to the Central Bank of Syria for hosting this conference and for the
interest in Islamic banking, and I think it is timely and wise to choose this topic for the
conference. I wish all success for this conference and the participants and I thank you all for
your kind attention.
Wassalmu Alikum Warahmatu Allah Wabarakatuhu.