Interview: Tirad M Mahmoud
To what do you attribute the relative resilience seen in the Islamic financial services sector in the wake of the global economic slowdown?
TIRAD AL-MAHMOUD: Islamic banks comply with a number of laws in the countries in which they operate as well as with the regulations and values based in religion. Generally speaking, sharia-compliant banks have targeted businesses that are connected to the real economy. These include trade, development, housing programmes, infrastructure and other assets that are part of the long-term economic development cycle. The risks that Islamic banks take are reduced or lessened because they are attached to normal economic activity; they are not part of speculative activities. Islamic banks steer clear of these activities and thus avoid some of the troubles conventional institutions have faced recently.
Do you anticipate demand for Islamic financial services in the UAE outpacing traditional banking services in the coming years?
MAHMOUD: In light of what has happened with the global financial crisis, businesses are taking stock and listening to clients’ demand for morally-sound practices. Islamic banks are well suited to cater to this gap in the market. If this business model is more successfully publicised, then demand for sharia-compliant banks and their services will increase dramatically and outpace conventional banks. People are interested in aligning themselves with things that do not conflict with their values. The world wants sustainability, transparency and basic values to govern this industry.
What role could securitisation play in Islamic finance and what lessons can be drawn from past mistakes?
MAHMOUD: Risk participation agreements are something Islamic banks have done from the beginning, and are a fundamental driver for any banking business. Securitisation means you have packaged something for the purpose of selling it. If a bank packages a product they are not prepared to buy themselves, then there is something fundamentally wrong. Sharia-compliant banking dictates products must benefit both parties.
The economic crisis of 2008 can be attributed to banks acting only in their self interest. This factor has brought about a financial disaster for investors, shareholders, depositors and even regulators. A major benefit of Islamic banking is that this sort of behaviour is not allowed, since the rules that govern Islamic banking are not created by a CEO, but are made by laws derived from religion and from other regulations. Islamic financial institutions will always be governed by the strictest principles of those rules.
What steps need to be taken to further deepen the Islamic debt ( sukuk) markets?
MAHMOUD: The sukuk market is being used more frequently because sharia-compliant bonds were more resilient during the crisis. To deepen the markets, sovereign sukuks need to be issued as a primary instrument; this is the missing link. Some investors are more attracted to sovereign financial instruments due to their lower capital allocation, low-risk nature and other technical issues. If sovereign issues continue, there will be a wider and deeper sukuk market.
To what extent will there be greater standardisation of sharia-compliance guidelines as cross-border financial transactions increase?
MAHMOUD: Many people would like to have sharia regulations simplified but this is not easy. Interpretation of Islamic religious laws can be more flexible in one school of thought than another, but no one law can overwrite another. Sharia rules around the world have similar fundamentals which are interpreted differently as a result of these different schools of thought. There is sufficient diversity, which in turn brings more flexibility into Islamic financial products and services. There will likely be convergence between the two models from Malaysia and the GCC as time goes on, but this evolves naturally over time, building from experience.
Read OBGs interview with Tirad Al-Mahmoud in The Report: Abu Dhabu 2015
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