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Emerging markets

Enabling Islamic banking to flourish

Blake Goud  Chief Research Officer at Middle East Global Advisors and CEO of the RFI Foundation

Blake Goud  Chief Research Officer at Middle East Global Advisors and CEO of the RFI Foundation

The rapid growth of the Islamic banking industry in Saudi Arabia, one of many in the Middle East where Islamic finance has developed, has been boosted by the consistent regulatory system applied across the whole banking sector. This growth has been supported by a regulatory approach that allows all banks to offer Shariah compliant financing to meet their customer needs. All of the banks—traditional and Shariah compliant—are regulated under the same regulatory framework and together make up a banking system which Fitch Ratings deemed the fourth safest in the world after Australia, Canada and Singapore.

These were some of the conclusions in a speech delivered by Dr. Fahad Almubarak, Governor of the Saudi Arabia Monetary Authority (SAMA) at the International Conference on Islamic Banking and Finance at Umm Al-Qura University. In his remarks, Dr. Almubarak highlighted the growth in the global Islamic banking system of 17% annually during the past five years. The foundation of the rapid growth of Islamic banking comes from the “lofty principles” built into Islamic finance that include investments in real assets, sharing profits and losses and a focus on social values.

The connection that Islamic banking creates to the value expectations of its customers has supported widespread adoption. SAMA has encouraged banks to meet the market demand for Shariah compliant products within the bounds of a single regulatory system which applies the highest local and global standards for prudential regulation to protect the banking system from systemic issues caused by the transmission of problems at one institution being spread to others.

This approach to prudential regulation and managing contagion in the banking system is more needed today than in the past due to the internationalization of the financial sector as a result of the “tremendous advances” in technology, communications and payment systems. The interdependence which these developments have created raise the prospect of easier transfer of crises from one country or financial institution to another. Notwithstanding the stresses to the global economy during recent years years, the resiliency of the Saudi banking system has proven the success of this approach in protecting depositors and the banking system as a whole.

Some of the key regulatory initiatives placed on the banking sector—both traditional and Islamic—to ensure its stability including those related to governance. These proactive steps covering supervision, internal audit and the role of external auditors are consistent with global practices and have been successful in helping the management and board of directors determine each bank’s objectives and review progress towards achieving them.

Despite its rigor, SAMA’s regulation of the banking system has remained flexible enough to allow for product innovation to meet customer needs which has emerged from specialized centers, universities, fatwa bodies and within banks’ Shariah supervisory committees. These innovations have facilitated participation in the market by all twelve local banks, several branches of foreign banks, thirty finance companies and 35 cooperative insurance companies. In managing the balance between prudential regulation and innovation, SAMA has allowed industry stakeholders to create new products consistent with the Shariah as well as in line with Basel standards covering banks’ liquidity, capital adequacy and risk management practices.


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Islamic Finance: Knowledge solutions powering decision making

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