Kingdom to give lead in macro-economics
11th December 2006
Bahrain can play a leadership role in adopting new monetary policy tools for macro economy management as the share of Islamic finance grows in size. The precedents set in Bahrain will be followed by other Muslim countries just as the co-existence model of Islamic and conventional finance perfected in Bahrain has been followed by other countries, says Dr. Malik Muhammad Mahmud Al Awan.
Professor Awan, who is in Bahrain to participate in the World Islamic Banking Conference 2006, believes that the Kingdom’s stature as a hub for Islamic banks and financial institutions is an ideal country to be role model in developing, adopting and disseminating the innovative laws to cater for the needs of the Islamic banking industry.
Mahmoud Al-Awan, who is a distinguished professor of Islamic Finance and head, faculty of Shariah at International Centre for Education Centre for Education in Islamic Finance (INCEIF), even discussed the matter with the top officials at the Central bank of Bahrain and presented his insight on how to develop the capital requirements and discount rate management laws for the Islamic banks and financial institutions.
Professor is not happy with the current system of capital requirements and computing the interest rates and says it is based on purely Riba concept and doesn’t correspond to the spirit of the Islamic banking industry laid down in the shari’ah, the main source of legislation for such institutions.
The Islamic banks, under the system, are distributing the profits according to the yield of the banks.
“The banks’ lending rate is over 14 per cent, while they offer the depositors less than five per cent. The investors are unable to challenge the banks and financial institutions due to lack of knowledge on such issues and the things can be corrected only if you know the factual position how the banks operate. There is a huge potential of growth which necessitate introducing appropriate legislation in this regard.
“A recent study by the United Nations Industrial Organizations (UNIDO), has shown that the private liquidity in the Middle East and North Africa ( MENA) region is growing at a rate of over twenty per cent per year. There is a strong preference in the region to invest this newly created wealth in Islamic enterprises. However, the absorption capacity of the region is limited in scope for the investment of these Islamic oriented funds. It is natural, therefore, for the fund managers to look for alternative locations and sharia compliant products elsewhere. One of the barriers to investment in this regard is the divergent Sharia interpretations and competing regulatory regimes that are operational in various Muslim countries. Significant progress has been made in recent years in standardizing interpretations of Islamic Finance Law with the work of AAOIFI, IFSB, and other international organizations including rating agencies and competitive indices. However, the industry remains regionalized because of perceived and actual differences in Sharia interpretations. This article reviews the essential nature of these differences and examines the impact on the efficiency and growth of the industry.