LONDON (Agencies): A wider variety of Islamic finance instruments would make it easier for monetary authorities to intervene in that market to control liquidity, Kuwait’s central bank governor said on Tuesday. Speaking at a conference on Islamic finance in London, Sheikh Salem Abdul Aziz Al-Sabah said: ‘We need to develop … more instruments to provide more investment opportunity for the public … and in order for central banks to use such kind of instruments to intervene in the market for the sake of regulating liquidity.’ ‘(There is a) need of having sovereign sukuk, those which provide sufficient cushion for monetary authorities to play a role in market operations in the Islamic banking.’
Sukuk is an Islamic bond backed by physical assets from which returns are paid to bond holders rather than interest. Meanwhile, Kuwait’s central bank is not happy that domestic inflation is historically high, although prices are not rising as fast as in other Gulf countries, Sheikh Salem Al-Sabah said on Tuesday. Speaking at a conference in London, Sheikh Salem also called for a wider variety of Islamic finance instruments which would make it easier for monetary authorities to intervene in the market to control liquidity.
Inflation
Kuwait’s inflation, which hit all-time highs of 6.2 percent in September, has become a political issue because the country relies heavily on imported goods, a third of which are paid for in euros, while its main export, oil, is priced in dollars.
‘Inflation is high historically. We are not satisfied… But compared with other countries in the region it’s not so high,’ Sheikh Salem told reporters.
In some of other Gulf Arab states, pricing are rising by more than 10 percent.
The region is struggling to control soaring inflation as higher oil prices spur rapid economic growth at a time when the United States is cutting interest rates to prevent the economy from falling into recession.
Kuwait broke ranks with its Gulf Arab neighbours preparing for a monetary union in the next few years and dropped its peg to the US dollar in favour of a currency basket, giving more flexibility in setting interest rates.
The country cut its repurchase rate by 50 basis points on Thursday following a U.S. Federal Reserve interest rate cut but kept its benchmark rates unchanged.
In December, Kuwait’s government unveiled a package of anti-inflation measures such as intensifying price controls in supermarkets.
Al-Sabah said creating more Islamic finance instruments were necessary as they would help monetary authorities in controlling liquidity.
‘We need to develop … more instruments to provide more investment opportunity for the public … and in order for central banks to use such kind of instruments to intervene in the market for the sake of regulating liquidity,’ he said.
‘(There is a) need of having sovereign sukuk, those which provide sufficient cushion for monetary authorities to play a role in market operations in the Islamic banking.’
Kuwait is one of the countries with the longest experience in Islamic finance as in 1977 an Islamic bank (The Kuwait Finance House) was established there, the Governor Sheikh Salem said in London Tuesday.
In his keynote speech to the Seventh Annual Islamic Finance Summit held at the Royal Lancaster Hotel, central London, the Governor of Kuwaits Central Bank said the Kuwait Finance House is now one of the leading Islamic banks in the world.
Specialised
At present there are three Islamic banks in Kuwait, one of which was a conventional specialized bank that turned into an Islamic bank, he added.
The Governor pointed out that there are also 39 Islamic investment companies in Kuwait which constitute almost half of the total number of investment companies operating in the country.
The Seventh Annual Islamic Finance Summit is organized by the ‘Euromoney’ group, with the support of the Arab Bankers Association here.
In his remarks Sheikh Salem also told leading bankers and financiers from a number of Arab and Islamic countries attending the gathering that, in terms of asset value, Islamic finance institutions in Kuwait retain a 29 percent of the local market.
The Central Bank of Kuwait, as a supervisory authority, has always believed in the importance of adopting a ‘holistic approach’ in regulating the Islamic finance industry, the Governor of the Central Bank observed.
As the demand for Islamic banking products and services accelerated, various shareholders, including the legislative and executive authorities, began to concur with the Central Bank of Kuwait (CBK) conviction that legislation is needed for the development of Islamic finance under the uniform supervisory policies and regulations of the CBK.
Hence, CBK has developed a supervisory framework for Islamic banks in Kuwait largely consistent with the international best practices for effective supervision of conventional banking, but adapted nevertheless, to suit the Islamic bank mode of operations.
Meanwhile, the Governor of CBK underlined that the Islamic finance industry has grown remarkably over the past few decades at a rapid pace of 15 percent to 20 percent a year globally.
Fastest
It has been widely acclaimed as the fastest growing segment in the global financial market, he recalled.
As a result, hundreds of Islamic finance institutions have proliferated in more than 75 countries, expanding their reach geographically to all major markets and going even beyond the Islamic world.
Sheikh Salem also said these institutions are no longer confined to markets with large Muslim populations in Asia and the Middle East.
Turning to the great success of Islamic finance, the Governor of CBK said that it has made a distinct impression in the area of world finance through its significant growth and development potential.
Furthermore, Islamic finance has become a lucrative business increasingly attracting both investors willing to supply funds through Sharia-compliant instruments, and borrowers demanding Islamic products and services, the Governor of CBK explained.
Referring to the Sukuk, which is the Sharia-compliant equivalent of the conventional bond, he said it is now one of the recent innovations in Islamic finance that has changed the dynamics of this industry.
The continued increase in demand for the products and services provided by Islamic banks has been conspicuously growing and even some major conventional banks have started to offer Sharia-compliant products and services.
Sheikh Salem said this is being done either through creating Islamic services ‘windows’ or through establishing separate Islamic banking units.
The Governor also highlighted that British Prime Minister Gordon Brown has said when he was the Chancellor of the Exchequer (Finance Secretary) that the UK wished to become ‘a gateway for Islamic trade and finance.’ Therefore the value of Islamic finance has risen sharply in recent years in the UK as many of its mainstream banks have Sharia-compliant offerings, he suggested.
In the meantime, the Governor made it clear that despite the remarkable success and expansion of Islamic finance and its global acceptability, nevertheless there is still considerable potential for it to grow further.
Looking to the future, Sheikh Salem said that the prospects for the Islamic finance industry in the State of Kuwait ‘look most encouraging and promising.’
Initiative
He also underlined the importance of the Kuwaiti Governments recent strategic development initiative which has been launched to turn the State of Kuwait into a regional trade and finance centre.
Both the executive and legislative authorities in Kuwait agree to the importance of carrying out this initiative, the Governor of CBK added.
The Annual Islamic Finance Summit was also discussing the challenges and growth of this rapidly developing banking industry and how competitive it has become in the modern world.
Among other topics to be dealt with are the trends and regulatory developments in the GCC.
Euromoney is a magazine created in 1969 to cover the re-mergence of the international cross-border capital markets.
The magazine reports on and champions this market and its growth, in the process becoming the prime magazine of the wholesale financial world, its institutions and its users.
