Kuwait’s central bank governor Mohammad al-Hashel is at the forefront of new thinking on Islamic finance.

Islamic finance has been one of the fastest growing areas of finance in recent years, but this growth has been from a very small base. Even in those Muslim countries where consumers have a choice between conventional and Islamic finance, Islamic finance has not gained a share of the market of more than 50%. How can it be made more attractive to customers?

At the moment a lot of the thinking on this seems to be coming out of Kuwait, from where I have just returned. All finance depends on market participants having trust in the institutions and products with which they engage. But with the risk-sharing approach of Islamic finance this is particularly crucial.

In two recent speeches, Kuwait’s central bank governor Mohammad al-Hashel has set out a number of legal and regulatory proposals that if they were adopted would take Islamic finance a long way forward.

“Today we lament the fact that our Islamic banks appear quite similar to their conventional counterparts, saddled with bulk of debt-based financing while the share of equity and other partnership based instruments such as musharakah and mudarabah remains negligible in their balance sheets,” said Mr Hashel. “Although there are many reasons for this phenomenon, one potential explanation is the lack of an appropriate mechanism to enforce the contracts that ensure mutual trust.”

He further added: “The upshot is that unless we create a legal environment that promotes risk-sharing finance by reinforcing mutual trust, the practice of Islamic finance is unlikely to converge towards its theoretical foundations.”

Mr Hashel’s proposals for improving the situation of Islamic finance more generally range from more rigorous analytical work to promoting innovation in financial institutions to improving regulation by creating an independent legal entity to oversee the sector.  

The Banker has been a champion of Islamic finance over the past few years and began collecting data on the sector back in 2006 to produce an annual ranking of top Islamic financial institutions. In The Banker's 2013 survey, total sharia compliant assets rose for the seventh consecutive year from $1166bn in 2012 to $1267bn. Growth was slower than in previous years but remained a healthy 8.67% giving an average annual growth rate of 16.02% since 2006.

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