(Sukuk.net - Arab News) Comments made by Professor Mahmoud El Gamal, chairman of Islamic Economics, Finance and Management at Rice University in Houston, Texas, while attending a seminar in Abu Dhabi recently on Africa-Arab Gulf relations have caused many to do a double-take of sorts on the entire Islamic banking industry.

El Gamal was reportedly commenting on the global financial crisis and stated that he felt that Islamic banks should also share equal responsibility with conventional commercial banks and financial institutions for the current global recession.

"Islamic banks did not provide true Islamic banking products, instead they gave an Islamic name to products of the commercial banks to attract clients who did not want to deal in interest," he explained.

He further stated that global Islamic banks are offering the same products and go through the same channels as those of commercial banks, such a securitization, Sukuk and Murabaha platforms, and complained about the lack of an international regulatory body for Islamic banking.

"In the past 30 years of Islamic banking, no authority has been established that can inform the international concerned bodies such as the International Monetary Fund (IMF) about their financial and investment products. Hence, no one has a clear picture of the activities of the Islamic banks, the number of their institutions and branches," El Gamal added.

The comments come at a time when global institutions, many of which have gone belly-up due to the global crisis, had begun to view Islamic banking as risk-free glimmer of light at the end of the recessionary tunnel.

It is true that Islamic banks have relatively been protected primarily due to their absence of toxic interest-based assets, (interest-taking is prohibited in Islamic banking). However, many like El Gamal are still raising the question of standard regulation as a major stumbling block to an industry which has recently grown to an estimated $900 billion and is forecast to grow annually by at least 15-30 percent.

The primary concern is the methodology behind how things are done. It has been the rule that most Islamic banks around the world usually assemble an Islamic or Shariah supervisory board whose job is to authorize that the financial products offered are following Shariah law which many say simply isn't providing the type of pure Islamic banking needs to completely exempt Islamic banks from contributing to the global recession, at least in part.

Yahia Abdelrahman, founder and Shariah supervisor of LARIBA Bank of Whittier in the US, told Arab News, "In the latter part of the 20th century it is well known that Islamic banks focused on starting with riba-based contracts or finance models and adapting them to fit into Shariah law. It became a force fitting of Islamic principles onto a conventional banking cast to make it look Islamic. Many focused on the changing of words, structuring deals, to make it look as if it fits Shariah law circumvented it and used rules to further make transactions appear Islamic. However, after you strip the process from all of these additions it becomes the same as a riba-based conventional contract and there is no difference in its outcome," he said, adding it is much the same as the structure blamed for the current international recession.

Abdelrahman further stated that when he initially established the LARIBA Bank, when Islamic banking first began in the US in 1987, he did so on a Shariah-based platform. "Notice I did not say Shariah-compliant, which implies force fitting a riba contract to comply. We focus on the intent, spirit and the benefit of riba-free financing not just the form that focuses on how the contract language is formulated. Instead, it is based on two important foundations set forth by Prophet Muhammad (peace be upon him) which are Commodity Indexation Principle and Marking to Market," he continued.

Abdelrahman added that as the industry expands and creates demand for more capital from the general global markets, outside the traditional Gulf petrodollars, it will need to attract investors who will invest in its products and services, and eventually its capital. This will force the industry to devise standards and strategies to meet this challenge.

He further said that in order to shape the architecture of the industry and its capital needs, Islamic finance must meet the most stringent measures of full disclosure and transparency, and the strict sense of corporate governance not only based on the banking and financial laws regulating the land but also the basic moral and ethical values and beliefs of faith. "I believe that there is no other course to take but to create an international regulatory body to oversee the Islamic finance structure on a global scale and to allow even conventional banks to adopt Islamic banking principles so the global financial crisis will never happen again," he concluded.
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