He brims with confidence and he talks the talk and walks the walk as the gatekeeper of the Saudi financial and economic sector, potentially one of the most influential in global finance because of its huge petrodollar surpluses and the fact that the Kingdom is the world’s largest oil producer and exporter, and as such exercises a vital role as swing producer in global oil market dynamics.
At the "Bank Negara Malaysia High Level Conference on Financial Stability" held in Kuala Lumpur last week, Gov. Al-Jasser spoke passionately on "Enhancing the Resilience and Stability of the Islamic Financial System: Fostering Global Integration in Islamic Finance – Strengthening the Home Host Supervisory Framework". With the globalization of banking, the relationship between regulators and foreign banks or subsidiaries of foreign banks operating in their jurisdictions has come under greater scrutiny.
"The stability of the financial system," stressed Al-Jasser, "is critical to a healthy economy. Generally speaking, financial stability encompasses the safety and soundness of financial institutions and the stability of the overall financial system. But this does not mean that the central bank and supervisory authorities must prevent the failure of every institution to achieve financial stability. The central banks must set clearly defined objectives (in the above respect). The ultimate objective should be to promote a resilient financial system and reduce the systemic risks that may be created by failure of a systematically important institution."
The governor’s remarks on Islamic finance however attracted much attention, for it is usually a rare occasion that a Saudi regulator or minister talks openly about Islamic finance at an international platform, albeit more about the global Islamic financial system than the specific market in Saudi Arabia.
Nevertheless, it gave a valuable insight into the thinking of the top Saudi regulator, arguably the most influential regulator in Islamic finance given that the largest pool of funds in the estimated $ 1.2 trillion Islamic finance market comes from the Kingdom.
Unfortunately, Al-Jasser’s remarks courted controversy. Some Malaysian officials and market players, in private, were disappointed and livid by his remarks.
"As a Muslim," he stressed, "it is offensive to me talk about ‘we against them.’ We have richness in diversity. The essence in Islam is permissibility. The genesis of things is permissibility. Everything is permissible unless it is shown to contravene Islamic tenets. Someone has to tell me if and how it contravenes explicitly. In fact, most conventional financial products are fine as long as they do not contravene Islamic tenets. Regulators and supervisors are not religious scholars. They are in charge of financial stability. The safety of the institution is paramount."
Al-Jasser rightly warned that Shariah-compliance on its own can never be a buffer against risk. "If a Shariah-compliant bank has heavy exposure to say the real estate market, it can go belly up," he added.
What was disappointing is the lack of clarity with regards to Islamic finance regulation and supervision. Although his remarks pertaining to the permissibility of things unless they are shown to contravene Islamic principles are accurate, its application to a modern scientific and systemic financial system is implicit.
As the Malaysians have shown with their dual banking model, this has to be ingrained in the financial regulatory and legal framework of a jurisdiction. There is no other way expect the entire Islamization of the banking system which has failed in countries such as Pakistan, Sudan and Iran, because of the global nature of finance, the implications for cross-border financing especially correspondent banking, and the sheer dominance of the interest-based system. Pakistan has since adopted the Malaysian dual banking model, which only a few weeks ago was enshrined in Malaysian law by the government of Prime Minister Mohd Najib Abdul Razak.
The implications of Al-Jasser’s remarks effectively rule out a stand alone Islamic banking law in the Kingdom, and a separate but equally rigorous supervisory regime for Islamic financial institutions, to take into account the specificities and special characteristics of Islamic finance. The governor’s views may also be perceived as a slap in the face for the Malaysian model, which most Islamic finance market players agree is the most systemic and advanced approach to regulating and supervising the sector.
This would also be against the trend in the GCC (Gulf Cooperation Council) countries where Bahrain, Kuwait, the UAE and Qatar all have stand alone Islamic banking and insurance legislation in place. The irony is that as chairman of the IFSB (Islamic Financial Services Board) for 2009, Al-Jasser must be cognisant of the numerous standards and exposure drafts which the board has issued over the last few years championing the specificities of Islamic finance and the strengthening its regulatory and supervisory systems to ensure the stability of the system to meet the various risks and changing challenges that the financial crisis has highlighted.
Perhaps the nature of the authorization of Islamic financial institutions – whether under stand alone Islamic banking legislation or general banking laws – is an urgent matter for the IFSB to discuss through a exposure draft with the aim of issuing a standard in this respect.
This is important given that Al-Jasser stressed that "Islamic finance is growing at a phenomenal pace inspite of the recent global financial crisis. This growth has also posed the challenge of promoting financial stability across the Islamic financial services industry."
At the same time the global expansion of Islamic financial institutions across borders and their movement out of their domestic markets, have raised issues of consolidated supervision and home host coordination for their supervisors.
"While Islamic finance has its peculiar characteristics, Islamic financial institutions are operating in the same financial markets as conventional banks and largely within the same regulatory environment. Thus the issues of home host coordination in the supervision of conventional banks are equally important in the case of Islamic financial institutions," he declared. Perhaps the governor should also consider the same peculiar characteristics when it comes to authorizing Islamic financial institutions.
