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KUWAIT CITY:  While Islamic finance appears as a right fit for a global financial system mired in ethical issues, especially after the global financial crisis, central bankers said a lot of work remains to be done.

From standards, oversight supervision to the need for independent Islamic scholars, challenges still remain and central banks are hopeful that the International Monetary Fund (IMF) would step in and lend its expertise.

Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz, speaking at a one-day Islamic Finance Conference here,  pointed out that Islamic finance has embedded financial stability elements with strong linkages to the real sector whilst there are checks and balances through profit sharing and sharing of risks.

However challenges remain in the adoption of standards to safeguard the financial stability of Islamic finance and these were due to the different stages of development by the practitioners of Islamic finance.

Adoption  and implementation of standards is still voluntary even if the Islamic Financial Services Board has 22 standards.

“For the adoption of Syariah compliance, there needs to be  a  robust framework for compliance and governance framework and  enforcement,”she said during a panel discussion at the conference hosted by IMF and the Central Bank of Kuwait.

Zeti however pointed out that some countries like Malaysia have also prepared the roadmap, allocated resources, started data collection and has talent development to grow Islamic finance.

The IMF, she suggested, could do its part through the adoption of standards and adding discipline in financial stability.

Just like conventional banking, the Islamic finance banking industry must also ensure that depositors have access to deposit insurance, which marks a discipline for financial stability.

In the case of Malaysia, Islamic finance products are also used extensively by non-Muslims. This is reflected in the 27 per cent contribution to the overall banking system compared to seven per cent in 2000.

As to macro-prudential measures, Zeti said there are both macro prudential and policy frameworks for both conventional and Islamic finance in Malaysia.

In Malaysia’s case, there are clearly defined mandates and powers through legal acts, integrated micro and macro prudential surveillance and risk assessment and  comprehensive tool kits.

Policies are also targeted to reduce unintended  consquences like spillovers which can lead to over adjustment.

Also several central banks across the globe have allowed the placement of deposits so as to facilitate liquidity management in Islamic finance system and broaden the assets and instruments. -- By Rupa Damodaran

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