A historic gathering aimed at expanding and regulating the Islamic banking system in the face of American opposition, was recently held in Kuala Lumpur, Malaysia. Gamal Essam El-Din attended Islamic banking has been under fire ever since the terrorist attacks of 11 September 2001. Indeed, an array of Islamic financial institutions have seen a decline in their reputation after the United States singled many of them out as having funded terrorist acts against the West, culminating in a series of executive orders by US President George W Bush. These have branded as many as 180 Islamic banks, charities and associations as financiers of terrorism. The "blacklist" includes reputable institutions such as Al- Taqwa (piety) Islamic Bank, Dallah El- Baraka Group and El-Rashid Trust. However, one year on, economic analysts have been surprised to find that most Islamic banks have managed to weather the post 11- September storm, in some cases even registering growth of 15 per cent. In order to maintain this robust growth in the face of US hostility, Islamic banks in nine major Muslim countries have set up the Islamic Financial Services Board (IFSB). On 3 November, the Malaysian prime minister, Dr Mahathir Mohamed officially launched the IFSB as a de facto Islamic Central Bank, globally regulating institutions offering Islamic financial products. According to Mahathir, the idea of the IFSB was first suggested by the Malaysian central bank in 1996, however, its implementation really gained momentum in the aftermath of the 11 September attacks. According to Mahathir, the attacks raised serious questions about Islamic finance's vulnerability to illegal practices, including the funding of terrorism. "However, the IFSB was not established just to absorb the 11 September shock and reinforce the stability of Islamic finance. It was created with broader objectives in mind," he said. He added that the IFSB has been established to act as a global authority for Islamic banking and finance. "It is a historic step aimed at internationalising the Islamic banking and financial system. It will ensure that Islamic banking incorporates international best practices and standards for supervision and regulation. These must not only be consistent with Islamic principles, but also based on standards that are on a par with those observed in conventional banking," Mahathir said. Elaborating further, Zeti Akhtar Aziz, the governor of the Central Bank of Malaysia, said that the IFSB was the culmination of two-years work by its nine founding members, with the support of the International Monetary Fund (IMF) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). "On 21 April 2002, there was a meeting of central bank governors from several Muslim countries, representatives from the IMF, the Islamic Development Bank (IDB) and the AAOIFI at the IMF's headquarters in Washington DC," said Aziz. He added that international institutions, such as the IMF and the Geneva- based, Bank of International Settlements (BIS), welcomed the launch of the IFSB as a means of reinforcing transparency in Islamic finance globally. The IFSB's launch was preceded by the establishment of the, Bahrain based, International Islamic Financial Market in April, and the International Islamic Rating Agency in October. Despite the establishment of the Islamic Development Bank (IDB) almost 30 years ago, and the AAOIFI over a decade ago, a standardised regulatory authority for Islamic banking was sorely lacking until the advent of the IFSB. "The IFSB's universally accepted standards are important for the growth of the Islamic financial services industry as Western attacks and divergent views on Shari'a have limited the flow of money and capital among Islamic countries," Aziz said. The president of the Islamic Development Bank, Ahmed Mohamed Ali, said that the IFSB's regulatory standards are non-binding so as not to encroach on the financial sovereignty of member countries. Nevertheless, since these standards were developed with the help of representatives from member countries' central banks and international monetary authorities and agreements, they are widely expected to be adopted, he added. The IFSB's nine founding members are Kuwait, Malaysia, Saudi Arabia, Indonesia, Iran, Sudan, Pakistan, Bahrain and the IDB. More members will be invited to join soon. "We hope that all 56 Islamic countries will join the IFSB within the next five years, so that universal objectives will be met," Aziz said. Membership falls into three categories: full membership, associate membership and observer membership. Qatar is expected to become the 10th full member. The IFSB will feature a council of governors nominated by the founding members, with a rotating chair. Following the IFSB's inauguration, this council met to approve Rifaat Ahmad Abdel-Karim as the IFSB's first secretary general. Abdel-Karim is currently secretary general of the AAOIFI. His term at the IFSB is expected to last three years. In addition to its role in standardising and regulating Islamic financial activities, the creation of the IFSB reflects a rapid growth in demand for Islamic financial products. Aziz stressed that, today, there is a strong demand for Shari'a (Islamic law) compliant financial products around the world. Indeed, statistics show that Islamic banks have managed to attract half of the Islamic world's individual savings over the last five years. Indeed, IFSB statistics show that the assets of these banks increased from $150 billion in 1989, to $215 billion in 1999. They are expected to soar to $400 billion this year. Over the next five years, a 15 per cent growth rate is projected. In Malaysia, the major driving force behind the IFSB's creation is the large size of the Islamic banking sector. Today, Islamic banking accounts for 8.8 per cent of the entire banking system's assets, up from 6 per cent a year ago, and 51 per cent of the private debt securities market is Islamic-based. However, there were questions over whether the creation of the IFSB was just a Malaysian attempt to gain easy access to the Middle East's surplus liquidity, thereby making Kuala Lumpur a Muslim financial hub. This amid an increasingly hostile investment climate in the West post-11 September. Aziz's response was to highlight the importance and legitimacy of redirecting Islamic deposits away from conventional markets in the West into, not only Malaysia, but the wider Islamic world. "It is a legitimate objective to channel as much as possible of these funds into the Islamic world," Aziz added. It is estimated that between $800 billion and $1.3 trillion are invested in markets in the West. Mahathir Mohamed's sees Islamic banking as a necessary step to creating an equitable and fair social and economic order. This, in the light of an international monetary system that has driven many developing countries into the financial slavery associated with endless mountains of debt. "A universal Islamic banking system is a jihad worth pursuing to abolish this slavery," Mahathir added.
