rasheed mohammed al maraj : business models in islamic finance – challenges and opportunities keynote address by he rasheed mohammed al maraj, governor of the central bank of bahrain, at the ifsb seminar on business models in islamic finance, manama, 3 october 2010. * * * your excellencies, ladies and gentlemen : it gives me great pleasure to be here this evening and to have the opportunity to contribute a few thoughts to the important and timely seminar on business models in islamic finance. i am sure that the morning session provoked many lively debates as the issues considered are of fundamental importance to the future of the islamic financial industry. as a major centre of islamic finance, bahrain wishes to see the industry move from strength to strength. however, this means on occasion being willing to pose some challenging questions for the industry to answer. we are all aware of the great potential that exists in the islamic finance field. following the global financial crisis there has been a resurgence of interest in the islamic finance model. some consultants are predicting that the size of the industry, currently estimated at around one trillion us dollars, could double within a decade. these are exciting predictions, but like all predictions they need to be treated with a degree of caution. as the health warnings on investment products constantly remind us, past performance is not necessarily a guide for the future. as a result, projections of spectacular future growth of the industry which rely on extrapolating the growth trends of the last five or ten years may not be the best guide to the future. the industry will only realise the predicted growth trends if it can properly address some fundamental issues, central to which are the business models of islamic financial institutions. the rapid growth in the industry in the last decade has meant that few sharia - compliant financial institutions have been able to achieve significant economies of scale. many remain comparatively small and focused on niche markets. the result is that we have an industry that comprises many small scale firms engaged in very similar activities and with comparatively high concentrations of risk. as i have said several times in the past, for the long - term health of the industry it is important to generate greater scale and diversity. diversification of the industry needs to occur over several different dimensions. in the first place, diversification is needed of the industry ’ s exposure to particular economic and industry sectors, such as real estate. many islamic financial institutions have built up a comparatively high exposure to the real estate sector. in part, this is the consequence of the requirement for

. we can set entry and licensing conditions to make it difficult for those who are dishonest or incompetent to set up firms or to work in the industry. we can require firms to have adequate financial resources to back the promises that they make, and adequate control systems to ensure that they can properly identify and manage the risks that they are taking. we can also mandate training and competency requirements for staff who deal directly with a firm ’ s customers. however, a regulator cannot be everywhere at once. nor should we aim to be. to a very large extent, maintaining public confidence in financial firms is the job of the firms themselves and their employees. as regulators we cannot set rules that ensure that people will behave honestly and with integrity. those are values that must come from within, they must be part of a firm ’ s culture. only an industry that takes seriously the need for ethical standards will be able to grow and prosper and to offer its customers the services they require. bis central bankers ’ speeches for this reason, i am very pleased that the cisi has chosen the subject of “ integrity at work ” for its first interactive seminar in bahrain. by encouraging participants to debate real life case studies, to consider their responses to them, and to suggest ways to deal with these problems, this learning environment will encourage participants to think more deeply about the ethical implications of their work place actions. as i mentioned earlier, bahrain is on course to have the largest cisi membership outside the uk. this fact demonstrates the already strong emphasis that firms in bahrain place on the importance of integrity and trust. it also illustrates one of bahrain ’ s many continuing strengths as a financial centre, our deep pool of qualified and experienced financial sector professionals. factors such as these will ensure that we can move on from recent events and remain at the forefront of financial centres in the mena region. thank you for your attention. bis central bankers ’ speeches