R Basant Roi: The Mauritius Islamic Finance Forum - premier event in Islamic
finance
Address by Mr R Basant Roi, Governor of the Bank of Mauritius, at the premier event in Islamic
finance, Grand Baie, 25-26 July 2005.
* * *
Hon. Deputy Prime Minister, Minister of Finance and Economic Development
Hon. Minister of Arts & Culture
Director of the Islamic Cultural Centre
Members of the Diplomatic Corps
Ladies and Gentlemen
Good Morning
I am very pleased to be here with you this morning for the Premier Event in Islamic Finance in
Mauritius. May I first of all express my deep appreciation to the Islamic Cultural Centre for having
taken the initiative to promote awareness in Islamic Finance in Mauritius. I do fervently hope that the
two-day forum will provide an excellent opportunity to share views and ideas on the principles
underlying Islamic finance and the way forward towards the promotion of Islamic financial services.
The concept of Islamic finance dates back to ancient times. However, formal Islamic financial
institutions are known to have been in existence for over 30 years. In the recent past, the growth of
Islamic financial services worldwide has gathered momentum. Islamic financial institutions are today
present in more than sixty countries across the world with total assets running in hundreds of billions
of US dollars. The services are certainly not confined to Islamic countries. They have increasingly
expanded beyond the frontiers of Muslim countries and are slowly taking roots in western financial
systems. I am sure that all of us here are aware that Islamic laws, or the Shariah, strictly prohibits fixed
or pre-determined rate of interest, the Riba as it is referred to, on financial instruments or such interest
arising from dealings and transactions in risk instruments. Here, in Mauritius, we do have bank
customers of 2 Islamic faith not claiming interest rates on their deposits. In fact, as of today, there are
about 260 holders of deposit accounts who do not claim interest. This is not a recent phenomenon. It
is a feature that has marked our banking industry for several decades and relatively unknown to the
general public in Mauritius. It obviously follows that issues relating to Islamic banking need to be
discussed and fully appreciated by all of us who are in one way or the other concerned with banking in
Mauritius.
Before I proceed further with my remarks, let me underline one aspect of Islamic finance that could
give rise to ill-conceived interpretation. Financial institutions in general keep adapting to changing
socio-economic environment. Finance does not have to do exclusively with any specific ethnically or
religiously defined groups. Islamic financial products are suitably carving out a market. There is indeed
a market need for these products and that market is expanding quite fast. Be they Muslim or not,
individuals and corporate bodies in western markets are increasingly purchasing, for instance,
Shariacompliant mortgages thus supplying funds to Islamic financial institutions to create more and more
Sharia-compliant mortgages. The Sharia-compliant mortgage is a product that is not subject to the
vagaries of interest rate volatility and as such this instrument is found to be the most appealing to bank
customers.
Having said that let me give a very broad brush-stroke of recent trends in Islamic banking. In a few
countries the entire banking system has been converted into Islamic banking; in some others the
banking system is dominated by conventional banking institutions operating alongside Islamic banks.
Over 250 Islamic financial institutions are presently operating worldwide. Several international banks
like the Citigroup, HSBC and Lloyds TSB are offering Islamic financial products and services either
through 'Islamic Banking Desks' within their conventional banking businesses or the establishment of
separate banks or subsidiaries that specialise in financial products. Indeed, these banks have
successfully added targeted services to their broader platform.
The sources of funds of Islamic financial institutions as well as the types offinancing proposed by
Islamic financial institutions have evolved over time. The main sources of funds are classified broadly
into current accounts, savings accounts and investment accounts - such as in the form of Amanah
and Qard-hasan deposit 3 understood as conventional deposit for safekeeping the face value of which
has to be guaranteed by the financial institutions. Mudarabah, refers to contracts in which a financial
institution purchases goods upon the request from a client and the profit or loss is shared between
them at an agreed upon ratio. This is classified as a loan. Participation term certificates and Profit and
loss sharing certificates: these certificates resemble shares in a company and are generally classified
as deposits. The principal types of financing are generally categorised into investment financing, trade
financing, lending and services - in the form of Qard -hasan loans, Murabaha, Musharaka, Ijara, Ijara
Wa Iktina and
Salaf. These are but a few of the financial products.
The modes of financing in Islamic banking emphasise principally profit-andloss sharing, although there
are also some non-profit and loss sharing modes of financing. Theoretically, Islamic banks are
relatively more concerned about the feasibility and profitability of a project while conventional banks
tend to rely more on collaterals. This is one of the features of Islamic banking that could be of
tremendous assistance to small-scale businesses. Conventional banking requires comprehensive
criteria that need to be satisfied for an applicant to become eligible for loans. Smallscale enterprises
throughout the world generally face greater difficulties in obtaining finance than large -scale
enterprises do. The services sector is made up of a large number of small entrepreneurs who usually
do not have ready access to finance. It is a matter of fact that small entrepreneurs who were able to
obtain credit facilities on the basis of collateral in the past are now finding it difficult to raise funds for
their operations. With the implementation of Basel II in the years ahead, there does exist a potential
risk that conventional banks would be less inclined to lend to small-scale enterprises. Given the
characteristics of Islamic banking, the small and medium enterprises is an economic sector where
Islamic banking could play a central role in giving a fillip to entrepreneurship.
In short, Islamic banks can play a catalytic role in fostering economic development although it has
been observed that, in practice, Islamic banks tend to favour short-term projects and trade finance -
which are less risky. This is principally due to a lack of adequate techniques for project appraisals in
an Islamic banking 4 context. Because of these weaknesses, it is advisable to address the need for
having staff with the required skills to learn the new processes for operating Islamic banks.
The provision of Islamic financial products and services has expanded beyond the market for
households, businesses and institutions to governments. They have made inroads into capital
Sukuk
markets. The bonds - which differ from ordinary bonds to the extent that they are
Shariahcompliant - have gained prominence. The market for Sukuk bonds is expected to register rapid growth
in the years ahead as more and more conventional financial institutions are expressing keen interests
and are actually participating in it. The expansion of Islamic banking across the world has inevitably
drawn the attention of central bankers and regulators in the Middle East and elsewhere to the risk
factor associated with it. Like conventional banks, Islamic banks also need to be effectively regulated
and supervised. Their strength and soundness are unequivocally as critical as for conventional banks.
However, the nature of risks associated with Islamic banking business brings forward an array of
issues in risk measurement, income recognition, adequacy of collateral and disclosure standards.
Effective prudential supervision for Islamic banks the world over is still in its infancy.
The very fact that Islamic banking differs from conventional banking in important ways poses
regulatory and supervisory problems. The risks taken by Islamic financial institutions are not directly
comparable to those of conventional financial institutions. In most of the countries where conventional
banks operate alongside Islamic banks, the same regulatory and supervisory standard is being applied
to the extent possible. So far the tendency has been to apply the standard set by the Basel Committee
on Banking Supervision. It is however recognized that the same standard as is applicable to
conventional banking cannot be made rigorously applicable to an Islamic banking framework.
Designing a comprehensive set of standard regulatory prescriptions and supervisory norms for an
Islamic banking framework that are valid for all countries is a task yet to be accomplished. A prominent
obstacle in the accomplishment of this task is the lack of uniformity in specific forms of Islamic
principles in Muslim countries. Certain Islamic banking procedures and financial instruments that are
accepted in one Muslim country may be rejected in another 5 Muslim country. The variants of Islamic
banking practices make generalisation difficult as to what constitute standard and universally
acceptable Islamic banking principles. It is deemed imperative to reach a paradigm version of Islamic
banking that could be used as a benchmark for the crafting of an effective regulatory system and
supervisory norms.
In short, the regulatory challenges raised by Islamic financial institutions are yet to be resolved in a
comprehensive manner. Some regulatory authorities have already started looking into the appropriate
regulatory framework. However, there is still quite a distance to travel before regulatory authorities
could come up with a standard and comprehensive set of regulatory prescriptions and supervisory
norms for Islamic banking.
Recognising these facts, the IMF supported and facilitated the establishment of the Islamic Financial
Services Board (IFSB) in 2002 with a view to promoting, disseminating and harmonizing best practices
in the regulation and supervision of the Islamic banking industry. The IFSB also aims at promoting
good practices in Islamic financial institutions in risk management through research, training and
technical assistance. It recently released exposure drafts on risk management standards for Islamic
financial institutions. The work of the Accounting and Auditing Organisation for Islamic Financial
Institutions is also of crucial importance. In the same vein, the work carried out by Shariah supervisory
boards for Islamic financial institutions is of commendable importance for regulatory authorities.
In conclusion, let me reiterate that banking is a universal concept that knows no boundaries - be they
geographical, ethnic or religious. Any form of banking, so long as it is conducted within the parameters
of the laws and regulations to provide services in the best interests of society, is most welcomed. May
I wish all the participants in the Forum fruitful deliberations. To the distinguished visitors participating in
the Forum, I wish them a pleasant stay in Mauritius.
Thank you.