(MENAFN- Khaleej Times) The UAE Central Bank is to give a big boost to Islamic finance in the country as a unified board of supervision will soon be set up with a mandate to issue guidelines to financial institutions on matters of Islamic finance.
Since the central bank embarked on reforming the financial sector after the 2008 global financial crisis, there were indications that the central bank wants a powerful Shariah supervisory board at the industry level, which could give directions and guidelines in light of Islamic principles of finance.
On last Tuesday, the board of directors of the UAE Central Bank was given a presentation on the establishment of the Higher Shariah Authority. The board meeting, which was provided over by Chairman of the UAE Central Bank Khalifa Mohammed Al Kindi, approved some of the recommendations that will help expedite the process to set up the authority.
Early this month, Governor of the UAE Central Bank Mubarak Al Mansoori speaking at a financial conference in the capital had hinted of setting up a unified Shariah board for Islamic banks.
At present each bank and financial institution has its own Shariah board that provides necessary guidance on whether the product or any lending proposal is Islamic or not.
Speaking to Khaleej Times, a banker said that global financial system has become very complexed and there are some scholars who take a hard line on some of the Islamic products. "So problem arises when some financial products are rejected on minor issues while in other countries similar products are allowed," he said.
The new move is aimed at removing all impediments to the growth of Islamic finance allowing Islamic lenders to deploy liquidity surplus in areas where they lag far behind. Islamic banks have a very small stake in $1 trillion trade finance in the country. With innovative products they can get a bigger slice. Islamic banks offer little to the small and medium enterprises, which is a growing segment of the economy.
A banker said some Shariah scholars are more progressive when they review proposals submitted for devising a financial product for today's highly sophisticated businesses, particularly in Malaysia.
So the idea was that there should be a central Shariah board at industry level comprising Islamic scholars and experts on finance, whose interpretations on Islamic finance must prevail in the UAE's financial system and that's one reason why the penetration of Islamic banking is low at 21 per cent in the UAE.
According to the World Islamic Banking Competitiveness Report 204-15, Bahrain, Kuwait and Kingdom of Saudi Arabia have made great strides in Islamic banking with the share of Islamic finance as high as 27.7 per cent, 44.6 per cent and 48.6 per cent, respectively.
The UAE Central Bank wants to pave the way for the UAE banks to reach to the level of its regional peers, a banker said.
"This move will bring greater consistency to the Islamic finance industry, which is rapidly expanding its outreach in the country," he added.
The Islamic banks and finance companies, which have a penetration of 21.6 per cent, must overcome obstacles if they have to grow to 50 per cent in 2020, according to a report of Abu Dhabi Islamic Bank. And this is precisely what the central bank is doing in coming months, he said.
Of 52 banks operating in the country, nine are Islamic banks. All conventional banks are allowed to offer Shariah-friendly products. They have separate Islamic banking divisions supervised by their own Sharia boards.
The assets of Islamic banking have expanded to a milestone figure of $100 billion in the UAE, according to the World Islamic Banking Competitiveness Report 2014-15.
However, a lot needs to be done to reach to a level where some GCC nations and Malaysia have reached by leading in the development of Islamic finance products.
Globally Islamic finance is a $2 trillion industry with assets are expected to reach $3.4 trillion by end 2018.
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