At the beginning, I would like to thank H.E. Dr. Khaled Saleh Al-sultan, the Center of Research Excellence in Islamic Banking and Finance at the university and the organizers of this conference. Also, I would like to thank you for inviting me to address this distinguished audience that includes a remarkable group of professionals and individuals interested in the economy and Islamic banking.
Dear Audience,
In his speech this morning, H.E the Governor addressed a number of significant aspects that affect the Islamic banking sector. However, in my speech, I will briefly touch upon the factors that have contributed to the development of banking industry over the last decade and their role in promoting financial inclusion. Afterwards, I will highlight SAMA's role in promoting corporate governance principle in the financial sector in the Kingdom.
Ladies and gentlemen,
This conference is held at a time during which sharia-compliant financial activity is witnessing a remarkable growth at the international level with an average of about 17 percent over the past five years and total financial assets reaching to nearly $ 2 trillion. The rapid growth and expansion of sharia-compliant banking is due to its noble principles that are widely accepted by the society. These principles include investment in real assets and sharing of profits and losses. It also adopts significant principles relating to the method and nature of realizing returns, in addition to observing social values and development requirements. Consequently, it has succeeded in attracting savings and meeting the needs of participants, serving their interests and contributing effectively to achieve deeper financial inclusion. This is evident in the steady growth of the Islamic Sukuk market as an ideal option for financing development and infrastructure projects in many countries around the world. Demand for sharia-compliant Sukuk grew from almost $10 billion in 2003 to $300 billion in the last year.
Dear Audience,
Sharia-compliant banking industry has undergone several developments over the last decades. The most prominent of which are the establishment of the Islamic Development Bank in 1975, and the Islamic Financial Services Board in Malaysia that started operations in 2003 and issued a number of standards and guidelines that have been contributing to the support and development of Islamic finance industry at the international level. It is noteworthy to highlight the significant and effective role played by specialized centers, universities, bank Sharia boards and committees in the development and growth of this industry over the last decade by improving financial tools and Sharia-compliant products such as Ijara , Istisna`a, Salam products, in addition to speculation, Musharaka and Murabaha contracts. The development of this industry is also extended to include other services such as offering syndicated loans, issuing banking undertakings and letters of guarantee, opening letters of credit, supporting small and professional enterprises, providing job opportunities, offering a various group of finance and Takaful insurance methods for enterprises, managing financial portfolios and investment funds, and asset securitization.
Ladies and gentlemen,
I would like to touch upon Islamic banking from a supervisory perspective. As it is known, the banking sector is the most important pillar in any economy at all times. I believe that the risks tackled by supervisory authorities in the traditional banking are the same in the sharia-compliant banking. I emphasize that the concepts and rules on which Islamic banking is based address such risks substantially in accordance with the risk concepts used in managing banking activity at large.
The most important objective of supervisory authorities, including SAMA, is to ensure financial stability. For this end, SAMA has set regulations, rules and instructions that constitute the framework to ensure financial stability in the Kingdom, especially in the banking sector. In its regulatory and supervisory rules, SAMA does not differentiate between traditional banking and sharia-compliant banking in terms of managing and addressing risks. For example, both Islamic banking and traditional banking share significantly the methods of credit, market and liquidity risk management, but the mechanisms and priorities of identifying and addressing such risks may vary. However, the framework that governs their management is the same for both types of banking.
If we compare the financial position of a bank whose activities are completely Sharia-compliant with another that combines the two types of banking, we will not find a substantial difference between the two financial positions in terms of risk types and methods of addressing them.
This indicates that the risks encountered by both types of banking are the same even if they vary in size, severity and methods of management. Moreover, Islamic banking pays more attention to the reputation aspect related to the design and development of products and services in terms of their compliance with Sharia. To better manage this type of risks, corporate governance principles were introduced to provide owners and participants with appropriate guidance regarding compliance with Sharia requirements. This includes establishing a dedicated and independent function to examine products' compliance with Sharia requirements and an independent Sharia committee to approve the use and method of implementing such products and report on its activities and bank's compliance with Sharia requirements.
This indicates that the supervisory authority copes with the banking development through having appropriate mechanisms and rules in place to verify the management of risks shared by both types of banking.
Over the years, SAMA has been focusing its efforts on the efficient performance of the banking sector given its nature of business, multi-stakeholders and its impact on the financial and economic stability. For decades, SAMA has been proactive in issuing instructions and guidelines regarding the importance of internal control and audit and the role of external auditors. Through its membership and contribution to the Islamic Financial Services Board (IFSB), it has also been focusing on corporate governance in the Islamic banking due to the nature of principles and activities thereof, which include profit-loss sharing. In December 2006, the IFSB issued the 3rd standard of the Guiding Principles on Corporate Governance for Institutions Offering only Islamic Financial Services (Excluding Islamic Insurance (Takâful) Institutions and Islamic Mutual Funds). The guiding principles are divided into four parts: General Governance Approach of IIFS, Rights of Investment Account Holders, Compliance with Sharia Rules and Principles, and Transparency of Financial Reporting in respect of Investment Accounts. These guiding principles affirm that there is no "single model" for corporate governance applicable to all countries. Therefore, each country has to set its own model which allows it to meet its specified needs and goals. In January 2009, the IFSB issued the Guiding Principles on Governance for Islamic Collective Investment Schemes, known as investment funds in some countries.
In March 2014, SAMA issued the first version of the Principles of Corporate Governance for Banks Operating in Saudi Arabia which conform to the international best practices. These principles aim at reinforcing the general governance framework; managing banks effectively; helping board of directors, executive management and committees to determine banks' goals and supervise their implementation; reviewing performance; and understanding the risks. They also aim at ensuring adequacy of capital, provisions, liquidity and lending ratios; protecting the rights of depositors, consumers and stakeholders; and reinforcing disclosure, transparency and accountability across the bank in order to enhance the efficiency of the bank's production and growth. I would like to reiterate that banking business should operate in consistence with best international principles and standards to ensure sound and effective performance and achieve economic financial stability.
In short, the success of Islamic banking depends on implementing it within its broadest and most significant framework. Finance types offered by the Islamic banking to the market participants are not the only reason for its development and expansion, as they are available in the traditional banking as well. The reason, however, is its noble principles to which such types of finance should be subscribing.
I believe that this side does not contradict with the goals of investors in the banking sector as owners. At the end, they want sustainable returns on their investments. Thus, having controls in place to avoid risks that may arise from uncontrolled activities will enable them to achieve that goal, as market dumping and reckless lending without considering the individual debt capacity are not encouraged by Sharia instructions. This is diametrically consistent with the debt burden ratio (DBR) concept applied in the credit industry.
Furthermore, preserving depositors' funds, with which a bank is entrusted, is fully consistent with the goals of keeping such funds and not squandering them. Once again, the globally identified term in the banking sector, i.e. LDR, is totally consistent with the Sharia requirement of keeping depositors' funds and not jeopardizing them through uncalculated risks.
Dear Audience,
In conclusion, I would like to reiterate what the Governor said in his speech this morning regarding the expected role of universities, research centers and Sharia committees in contemplating obstacles, improving financial products and services, meeting consumer needs and contributing to achieve balanced development at economic and social levels. I would also like to highlight that this role is one of the key challenges facing decision makers in all countries.
An example of the role expected from researchers and professionals is addressing the weak culture of savings among individuals that is likely attributable to the lack of or low unattractiveness of Sharia-compliant saving products in the financial sector, which will in turn be reflected adversely on attracting new savings. In my opinion, we need to develop saving products that meet consumers' needs and serve their interests in a way that contributes effectively to achieving deeper financial inclusion and helps in directing individuals, especially those with low or middle income, to long-term savings and directs their savings to sectors that serve the economic and social development.
I would like to thank again H.E. Dr. Khaled Al Sultan, King Fahd University of Petroleum and Minerals for the efforts in the development of Sharia-compliant banking industry, Center of Research Excellence in Islamic Banking and Finance at the university and to all organizers of this conference. I would also like to express my appreciation to the remarkable group of international experts and professionals who attended this conference, wishing it will enrich knowledge and provide expertise that allow for developing finance services and Islamic banking in the Kingdom and around the world.
Thank you.