Call for common risk management system

The Islamic finance industry needs a common risk management system to police institutions now guided by voluntary standards and ill-fitting conventional rules, a banker and an asset manager said yesterday.

The Shariah finance industry is a global reservoir of $1 trillion (Dh3.67trn) of assets but regulatory standards differ across jurisdictions in the absence of a central governing body.

Upheavals in global financial markets have put the supervision of banks under the microscope, reinforcing the fragmented structure of Islamic regulation and the need for more safeguards.

"We still don't have a common risk management practice across the whole industry," said Islamic Bank of Asia Chief Executive Vince Cook on the sidelines of a conference.

"It's quite difficult to squeeze the Islamic industry into the conventional regulatory framework. There are certain risks which a conventional regulatory framework doesn't necessarily cover."

Singapore-based Islamic Bank of Asia is backed by DBS, Southeast Asia's biggest bank by assets.

Standard-setting agencies such as the Accounting and Auditing Organisation for Islamic Financial Institutions and the Islamic Financial Services Board regularly issue guidelines but cannot compel compliance by countries and financial institutions.

Some Islamic banks are adopting capital standards based on Basel II, a set of guidelines prepared by a committee that is backed by central bank governors of industrialised nations.

But religious scholars have said the Basel standards need to be adjusted to accommodate the peculiarities of Shariah banking.

Unlike conventional financing, Islamic banking argues for a fair distribution of profit and loss and often takes the form of profit-sharing agreements.

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