| Hakim Hayat |
ARSHADUR Rahman, Bank of England’s Islamic finance specialist, praised Brunei’s vision to become a regional Islamic financial hub.
Arshadur, who was on a short visit to Brunei Darussalam, commended the ambition, which he said shows the country’s strong desire to thrive and develop in the sector.
“An important thing is that because this is a fairly young and growing area, it is even more important to share knowledge and experience between jurisdictions, to improve overall understanding of the sector,” he told the Bulletin in a recent interview.
Arshadur also said that the Islamic finance appears to have seen more interest over the last few years, signalled by the growing number of financial institutions offering Syariah-compliant products and services.
The UK’s central bank is currently working on the establishment of a Syariah-compliant central bank deposit facility to provide Islamic banks in the UK with greater flexibility in meeting their requirements under international liquidity rules.
It is also as part of its commitment to promote a more diverse market, able to provide a range of banking products and services to cater to different demographics.
Arshadur added, however, that it is worth bearing in mind that despite double digit growth over the last few years, the global perspective of Islamic finance is that it is still a relatively new sector, starting from a low base, whereas the conventional financial system has grown over centuries.
He also shared that the global financial crisis almost a decade ago affected all areas of the financial services sector, including Islamic finance, either directly or indirectly.
Syariah-complaint financial institutions and economies were not immune to the effects of the downturn, despite opinions from some parts of the market pre-crisis that Islamic finance might effectively be ‘decoupled’ from the conventional market.
“This was found not to be true because many parts of the market were hit… so the decoupling between Islamic and conventional banking systems was not found to really apply here because the global market is an interconnected financial system,” Arshadur said.
He also shared his view that Islamic finance is not inherently more or less risky than other forms of finance, but the risks would depend on individual firms and the business models they chose to implement.
Arshadur was invited as a guest speaker to share the UK’s experience as a global financial centre and Islamic finance during the recently concluded Brunei Darussalam Islamic Investment Summit (BIIS 2017).
The Islamic finance specialist also shared the Bank of England’s responsibilities in promoting a diverse and level-playing field for financial institutions in the UK, including Islamic financial institutions.
“A number of jurisdictions see Islamic finance as a way to provide diverse range of products and services… the Bank of England is committed to diversity as a statutory body.
“We see Islamic finance fitting in the framework of a more diverse and pluralistic financial service,” he said, adding that the Bank of England does not promote one form of finance over another but aims to as much as possible to provide a level playfield for all types of finance, so people can go into the market and select products and services at their own preference.
As one of the oldest central banks in the world, Arshadur said that the Bank of England’s objective is to maintain monetary and financial stability, for the good of the people of the UK.
“It is a large organisation and does a lot of things like implementing monetary policy, and acting as the prudential regulator for banks, insurers, and the largest investment companies,” he shared, adding that the central bank is also supervising five stand-alone Islamic banks, and a number of conventional banks that also offer Syariah-compliant financial products.
Arshadur’s job as a specialist in Islamic finance involves him working with colleagues across the Bank of England in establishing a central bank liquidity facility to allow Islamic banks in the UK to have greater flexibility in managing their liquidity, as part of the prudential regulations under the ‘Basel III’ rules, which require financial institutions to have sufficient capital and manage their liquidity effectively to ensure their customers are protected.
Explaining further about the rationale behind the implementation of the Syariah-compliant central bank deposit facility, Arshadur said that in the wake of the global financial crisis, banks were required to hold a buffer of high quality liquid assets (HQLA), which they could sell quickly and reliably if they needed to raise cash during a stress event.
However, the range of HQLA which are also non-interest-based is more limited, leaving Islamic banks with less choice of instruments to hold.
Banks can also place deposits with the central bank to meet their HQLA requirement.
In the UK however, Islamic banks cannot currently do this because the Bank of England’s existing deposit facilities are interest based – this is why the Bank of England is working to establish a deposit facility which is not interest based.
“We recognised this as a challenge. We therefore undertook a few years ago to assess the feasibility of establishing an Islamic Syariah-compliant central bank deposit facility, which is in its implementation phase now.
“The facility will be non-interest-based and available for use by any banks which are prohibited from engaging in interest-based activity – this could potentially include some banks which do not identify themselves specifically as being Islamic,” Arshadur explained, adding that they hope this will provide Islamic banks with more flexibility in meeting their liquidity requirement, as with conventional banks.
On his perspective on the long-term growth of Islamic finance, Arshadur said it is still too early to forecast its success.
“There is certainly an interest in Islamic finance, partly motivated clearly by faith and also some ethical proposition and commercial considerations but the question is how quickly that will progress and how it will expand over time because there are lot of factors… in the medium longer term, I hope it will work well although there may be hiccups along the way,” he said.
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