The Islamic financial system is not immune to risks and can be susceptible to financial crises due to a number of reasons, Secretary-General of Islamic Financial Services Board (IFSB) Rifaat Ahmed Abdel Karim said here on Thursday.
"As Islamic finance is closely linked to the real sector, unexpected adverse developments in the real sector may adversely affect the business activities and performance of Islamic banks in the absence of robust and effective risk management practices," Rifaat said at the opening ceremony of IFSB-IIF (Institute of International Finance) Conference.
The 2-day conference, themed "enhancing the resilience and stability of the Islamic financial system", attracted over 250 high level financial industry professionals from the central banks of Brunei, Indonesia, Malaysia, Mauritius and Sudan as well as international organizations such as the World Bank, the International Monetary Fund, Asian Development Bank and Islamic Development Bank.
Islamic banks may be enticed to pursue aggressive speculative investment strategies with higher risk and higher expected return, particularly during economic upturns, without a concomitant adherence to fundamental and sound risk management standards, Rifaat said.
And, Islamic banks may violate Shariah principles, or their fiduciary responsibilities towards investment account holders, in their business operations and conduct, which may in turn result in financial losses and trigger a crisis of confidence involving systemic risk in the Islamic financial system, he added.
According to him, it is of utmost importance to ensure that the standards developed and adopted by the IFSB are promptly implemented and effectively enforced in jurisdictions where Islamic financial services are being offered.
This would enhance the understanding of the stakeholders of the Islamic financial services industry (IFSI) on the peculiarities of Islamic financial business and its risks and thus strengthen their capabilities to effectively manage these risks in order to achieve the desired outcome of financial stability in the IFSI, he said.
IFSB, based in Kuala Lumpur, serves as an international-standard setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the IFSI.
Source:Xinhua
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