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Banking

Islamic finance needs solid foundations

Islamic banks have much potential to tap Islamic, ethical and conventional borrowers and investors. The key will be whether the industry can introduce the regulatory standards to reassure investors. Nigel Dudley reports.

BANK REGULATORS AND international organizations are launching a concerted drive to establish global standards for Islamic banking to bring coherence to the industry.

Last year, a number of central banks, led by those from the Middle East and Asia, set up the Islamic Financial Services Board (IFSB) to set and disseminate prudential and supervisory standards for the industry. The Kuala Lumpur-based IFSB is "already finalizing standards on risk management and capital adequacy and in the coming months will turn its attention to corporate governance", says its secretary general, Rifaat Ahmed Abdel Karim.

Senior figures from the Islamic financial services sector are negotiating with the IMF, World Bank and the Basle Committee to establish globally accepted standards. And much work has already been initiated by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). It has issued more than 20 accounting, auditing and ethical standards.

Demands of growth There are more than 200 Islamic financial institutions, with more than $200 billion in deposits operating in more than 25 countries, and the sector is thought to be growing at about 15% a year. Zeti Akhtar Aziz, the governor of Bank Negara Malaysia (the central bank), says that the Islamic sector, which now comprises 10% of the banking system, is expected to grow to 20% by 2010.

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