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In search for a global standard in Islamic banking

ISTANBUL - Hürriyet Daily News | 4/6/2011 12:00:00 AM | GÖKHAN KURTARAN

Islamic banking is growing rapidly in the aftermath of the global financial crisis, but it desperately needs a global set of standards that every country and institution accepts. Speaking to the Hürriyet Daily News in Istanbul, an expert says the Turkish Central Bank might ‘take the lead’ in this effort. ‘Risk has no religion,’ says Khalid Ferdaus Howladar of Moody’s, adding that he likes the Turkish term ‘participation bank’

Turkey may not be ready to take a prominent place in the world of Islamic finance due to the ongoing political tension on religion’s role in the society, but an expert says Islamic finance needs input from the nation on how to proceed.

Noting the often-contradictory interpretations of the principles of Islamic banking, Khalid Ferdaus Howladar, the vice president and senior credit officer of Moody’s in the Middle East, suggested that the Turkish Central Bank might “take the lead” in establishing a global standard that would help Islamic banking become more transparent.

Howladar was speaking to the Hürriyet Daily News & Economic Review in Istanbul on the sidelines of the “Seminar on Managing Liquidity in the Islamic Financial Services Industry” event held Wednesday.

Speaking at the event, Central Bank Gov. Durmuş Yılmaz said the establishment of a “carefully designed and constructed” Shariah inspection board could be a step in the right direction, without mentioning any possible role Turkey might play in this.

“As a new and developing banking model, Islamic banking has some deficits compared to conventional banks,” Yılmaz said. “In the latter, which has a well-developed interbank money market, lenders [can choose from] various instruments.” He noted that because these instruments rely on interest they cannot be a choice for Islamic banks.

“In the Islamic world, there are various problems about the terminology, products and contracts in Islamic banking,” Howladar told the Daily News. “The terms used in Islamic banking do not necessarily have the same meaning in different countries. The meaning often changes from one bank to another.”

He gave examples of the use of “musharakah,” a joint venture agreement between two or more partners, whereby each partner provides funds to be used in a venture, or “mudarabah,” a special kind of partnership whereby one partner gives money to another for investing it in a commercial enterprise. The meanings of these two accords are interpreted differently in different countries.

“There is no global standardization in Islamic banking yet,” Howladar said, emphasizing the key problem of Islamic banking.

[HH] Central banks to the center stage

However, he suggested a way out – one that gives Turkey a key role. The much-needed standardization could be attained through the cooperation of the central banks in countries such as Turkey, Qatar and Malaysia. “In that sense, Turkey might become a model for protection of consumer rights in Islamic banking and lead other central banks in bringing standardization,” Howladar said.

He said the conclusions of the Islamic Financial Services Board, or IFSB, an international standard-setting organization, are not binding. As opposed to a powerless organization, cooperation among central banks could create “some power to bring a standard into Islamic banking in the global sense,” he said.

The interest in Islamic banking has been on the rise, particularly after the global financial crisis. Last year, the global size of the industry stood at around $1 trillion. In 2015, the figure is expected to surge to $2.7 trillion. Interest rose in the aftermath of the crisis, as Islamic banking is strictly linked to underlying real assets, as opposed to “exotic” derivatives that played a great role in triggering the crisis.

“I like the way that Islamic banking is named participation banking in Turkey,” said Howladar, pointing out that the industry is not just for the use of Muslims, but has become an alternative for non-Muslims, too. Thus, the term “participation banking” might attract non-Muslims, he said. “Risk has no religion.”

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