The Middle East market apparently has the perception that Islamic financial products developed in Asia are not truly Shariah in nature but instead only have a Shariah “camouflage”.
After going through the Monetary Authority of Singapore’s (MAS) Guidelines on the Application of Banking Regulations to Islamic Banking, I am inclined to agree with the above statement.
In Section 2, it was stated that both Islamic and conventional banks face similar risks and therefore MAS has adopted the same regulatory approach. Yes, most of the risks are similar if not identical but when it comes to credit risk and Shariah compliance risk, the picture changes altogether. The difference in Shariah interpretation and opinions poses a major risk especially when a dispute arises, although the governing law is defined in the terms, it would be unfair and somewhat illogical if Islamic law is not taken into consideration when resolving disputes.
Credit risk faced by institutions offering Islamic financial products cannot be similar to those of conventional banks. Most Islamic financial transactions are supposed to be partnership based whereby the returns are not predetermined, unlike a typical loan or bond. The terms which underlies an Ijarah transaction is not (should not) be identical to that of a conventional finance lease contract. Even a Murabahah transaction which in effect is a debt transaction has different risk considerations due to the Shariah call for justice, equity and transparency.
Given that, I do not totally agree with the risk management approach pursued by MAS.
In section 4.17 (Ijarah wa Iqtina), the bank has ownership of the asset but despite being the owner it is not to assume any ownership risks. Well, this is fine, if a willing agent can be found to assume the risk, why not? But what is not fine is when MAS expects the banks to ensure that they are protected against any losses from movements in the market value of the asset. This goes against the spirit of Ijarah, labelling such products as Ijarah would tantamount to mockery. IMHO.
Section 4.21 (Diminishing Musharakah) says that the bank should not be exposed to fluctuations in the market value of the asset, except in the event of a default. It goes on to say that the bank may structure the loan (yes, the term loan was used for a partnership based arrangement).
To ensure the success of Shariah based financial instruments, the regulators must be the main driver and should provide guidelines that truly conforms the uniqueness of Islamic banking. Drawing up a guideline that resembles (copies) the conventional infrastructure would not help in the growth of Islamic banking and finance but instead will cause Islamic finance to be seen as no different from their conventional counterparts.
After going through the Monetary Authority of Singapore’s (MAS) Guidelines on the Application of Banking Regulations to Islamic Banking, I am inclined to agree with the above statement.
In Section 2, it was stated that both Islamic and conventional banks face similar risks and therefore MAS has adopted the same regulatory approach. Yes, most of the risks are similar if not identical but when it comes to credit risk and Shariah compliance risk, the picture changes altogether. The difference in Shariah interpretation and opinions poses a major risk especially when a dispute arises, although the governing law is defined in the terms, it would be unfair and somewhat illogical if Islamic law is not taken into consideration when resolving disputes.
Credit risk faced by institutions offering Islamic financial products cannot be similar to those of conventional banks. Most Islamic financial transactions are supposed to be partnership based whereby the returns are not predetermined, unlike a typical loan or bond. The terms which underlies an Ijarah transaction is not (should not) be identical to that of a conventional finance lease contract. Even a Murabahah transaction which in effect is a debt transaction has different risk considerations due to the Shariah call for justice, equity and transparency.
Given that, I do not totally agree with the risk management approach pursued by MAS.
In section 4.17 (Ijarah wa Iqtina), the bank has ownership of the asset but despite being the owner it is not to assume any ownership risks. Well, this is fine, if a willing agent can be found to assume the risk, why not? But what is not fine is when MAS expects the banks to ensure that they are protected against any losses from movements in the market value of the asset. This goes against the spirit of Ijarah, labelling such products as Ijarah would tantamount to mockery. IMHO.
Section 4.21 (Diminishing Musharakah) says that the bank should not be exposed to fluctuations in the market value of the asset, except in the event of a default. It goes on to say that the bank may structure the loan (yes, the term loan was used for a partnership based arrangement).
To ensure the success of Shariah based financial instruments, the regulators must be the main driver and should provide guidelines that truly conforms the uniqueness of Islamic banking. Drawing up a guideline that resembles (copies) the conventional infrastructure would not help in the growth of Islamic banking and finance but instead will cause Islamic finance to be seen as no different from their conventional counterparts.
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