Datuk Dr Mohd Daud Bakar is the founder and executive chairman of Amanie Advisors, a Sharia’a advisory firm with offices worldwide.
He chairs the Sharia’a Advisory Council at the Central Bank of Malaysia, the Securities Commission of Malaysia. A Sharia’a board member on various financial institutions in Malaysia and the Middle East, Dr Bakar is also deputy chairman on the board of Al Madina Takaful in Oman.
Dr Bakar was recently in Muscat to attend Al Madina’s Sharia’a board meeting. In an interview with Muscat Daily, he spoke about the global Islamic finance industry and shared his views on the outlook for Oman’s Islamic banking and takaful markets
How do you view the current environment for Islamic finance in the world, and what are its key growth drivers?
The Islamic financial industry is now four decades old and over the years it has evolved and transformed into a driver of economic growth. In recent years, particularly since the global financial crisis, the pace of growth in Islamic finance has been quite significant. The compound annual growth rate (CAGR) of Islamic banking and finance has been outperforming that of conventional banking for many years. It is entering new markets and doing very well in many parts of the world now.
What are the growth prospects for Islamic banking in the GCC?
In the Gulf region, Saudi Arabia and the UAE are doing well in terms of Islamic banking and finance and I think that is because they have comparatively larger economies. Bahrain started Islamic banking early but it is a small economy. We need to have a strong economy to support this sector. But it is progressing well in the UAE and Saudi Arabia, as well as in Oman.
In Oman, a new market for Islamic banking, we need to spread awareness at all levels through all available channels. If you put in efforts over the next five years, you will see a different landscape for the Islamic banking and takaful industry here.
Can you elaborate on how Sharia’a supervision is integral to the Islamic financial industry? How should a Sharia’a board function to be effective?
Sharia’a compliance is of significant essence in the governance of Islamic financial institutions. Sharia’a compliance is all about processes and issuing decisions. And these two aspects must be looked after very well at every institution. Sharia’a boards or advisers are entrusted with the duty of directing, supervision and approving the activities of institutions. A board can give its decisions or approvals but it is the duty of an Islamic finance institution to ensure that all of its activities are Sharia’a-compliant.
The process has to be properly followed by institutions. The processes in terms of contracts, marketing, policy and systems should all be Sharia’a-compliant. For all these purposes, institutions need to rely on a lot of training for management. Institutions should not just rely on Sharia’a boards because most board members do not have full-time roles and are third-party consultants engaged to give approvals.
In the Middle East, the Sharia’a-compliance departments of banks and other institutions are small compared to some other markets. There should be four-five people appointed specifically for these departments. This is missing in the region.
Is there a severe shortage of Sharia’a scholars in the region? If so, what needs to be done to address this challenge?
There is a shortage. We need to create more scholars and we need to create a second and third generation of scholars. I do not have much idea how governments in the region are tackling this issue. Governments and regulators need to put in place initiatives and incentives for students to become Sharia’a scholars. They should create conditions to attract the younger generation to become scholars.
What are the challenges that takaful markets face on a global scale?
There has been tremendous growth in the Islamic finance industry. But, however, takaful or Islamic insurance somehow has not developed as fast as the other components of the industry. The reason behind this was that people are always motivated to borrow or earn money from banks and other institutions and from the market, whereas they have to pay money for takaful. This perception among people led to the slow growth of the takaful industry. Takaful still needs a lot of awareness and self-conviction among people.
The conventional insurance market in Oman is considered overcrowded and takaful is a new concept for consumers here. What is your view on the growth outlook for the takaful market in the sultanate?
It would require a great deal of awareness for people to realise that takaful is as beneficial as conventional insurance. Takaful has to be as good as conventional insurance for consumers with full compliance to Sharia’a principles.
In Malaysia, people 30 years ago thought takaful cannot compete with conventional insurance and would always play second fiddle to it. But the situation is different today, where conventional insurance has stopped growing and both Muslims and non-Muslims are turning to takaful in a big way. This has led to a situation where many insurers are converting to takaful operators to tap the growth potential.
Similarly, I believe if the right strategy is put in place then takaful has the potential to overtake the conventional insurance business in Oman. In the future, we could see mergers and acquisitions or joint ventures between insurance players to launch takaful operations. I think in the next three to five years more and more conventional insurers will look to convert to takaful companies. Oman being a Muslim country, I believe takaful will grow faster here, not only for new operators but also for existing ones.
Islamic banking is now in its third year of operations in Oman and the central bank is yet to introduce Islamic liquidity management tools. How urgent and important do you think is the issue of liquidity management for Islamic banking here?
It is very important to have liquidity management instruments and to activate the Islamic money market. There are many products that the Central Bank of Oman can pick and choose from. And it should introduce such instruments expeditiously. Borrowing money from outside or parking it there can be expensive for banks. The time has come for the local market to have its own liquidity management platform.