The scope and potential of Islamic finance, insurance, and banking in the Maldives is “yet to be fully explored”, suggests Maldives Monetary Authority (MMA) Governor Dr Azeema Adam.
Speaking at the opening ceremony of the first ‘Maldives Islamic Banking and Finance Industry Conference’ yesterday, Dr Azeema said Islamic finance “provides a springboard” to generate innovative ideas to cater to the financing needs of the domestic economy.
“The phenomenal growth of Islamic insurance and Islamic banking in the Maldives in the last few years suggest that there is still significant market to capture,” the central bank’s governor said in her keynote address at the conference.
“There is a need for financial institutions in the Maldives to strive to reach to every corner of the Maldives; every island in the country. There is a need to provide banking services to the unbanked,” said Azeema.
Islamic banking and capital market services were introduced in the Maldives in 2011, with the opening of the Maldives Islamic Bank (MIB).
Providing banking services to all inhabited islands “might not always be profitable,” Azeema continued, requiring innovation within the Maldivian financial sector.
“Financial products in the Maldives need to transcend the oceans and reach each and every person in the country, including those in the most isolated and remote islands.”
To support the growth of Islamic finance, Azeema recommended development of a “comprehensive legal and regulatory framework specific to Islamic finance”.
The MMA has formed a ‘Shariah Advisory Council’ to ensure Shariah compliance, she continued, while legislation on Islamic banking and Takaful has been drafted.
The governor expressed hope that laws on the “two key components of Islamic finance” could be enacted before the end of the year.
Under Islamic Shariah, any risk-free or guaranteed rate of return on a loan or investment is considered riba (usury or interest), which is prohibited in Islam.
Conventional insurance is also prohibited in Islam because of forbidden elements such as riba.
Azeema observed that from a modest beginning in the 1970s Islamic finance was now a global industry with a total asset value of US$2 trillion.
“At its current pace, the growth in Islamic finance stands sharply ahead of conventional finance which experienced significant de-leveraging and slowdown in the wake of the global financial crisis,” she noted.
“One of the reasons for the phenomenal growth of Islamic finance is the perception that it is more ethical, compared to conventional finance, which is traditionally viewed as predatory when needed.”
While the industry represented a niche market for Muslims, Azeema said it has since “transformed to a viable alternative for consumers of convention finance, irrespective of their religious beliefs.”
“The basic tenets of Islamic finance, like the idea of sharing profits and losses, investments only in ethically permissible areas, and the inseparable link of finance with real and productive economic activities, are understandably appealing to all,” she explained.
“It is this humane face that is required to encourage and reward those Maldivians who work hard. The individual and self-employed entrepreneurs who needs a financier to realise their dreams; the creative youth who need a bank to fund their ideas; the small and medium enterprises who need access to easy financing; and the large enterprises who need a wide range of investment and financial products.”
In addition to its ability to cater to the diverse groups in the Maldivian economy, Adam suggested Islamic finance could “bring about a more equitable society; a responsible and hardworking society; a society where individual creativity and free enterprise thrive.”
The governor suggested that competition among financial products could help correct “market failures” and was welcome in the Maldives.
Islamic finance could also be “a reliable alternative source of funding” for investors, she added.
The introduction of Islamic finance has been “a long journey,” Azeema said.
While Amana Takaful started selling insurance in 2003, the Maldives Islamic Bank commenced operations in March 2011.
“The strong mobilisation of deposits that followed the commencement of MIB confirmed the latent demand for Islamic finance and the need for an institution offering Islamic financial services,” she observed.
Since 2011, she noted, housing finance based on Shariah principles have been made available while Allied Insurance was offering takaful products through their window named Ayady Takaful.
The Bank of Maldives has meanwhile been given approval to establish an Islamic banking window, she added.
“The development of an Islamic Capital Market has also been initiated with one listed Shari’ah compliant equity,” she said.
In March, Deputy Islamic Minister Dr Aishath Muneeza said that, in addition to the introduction of Islamic fund management this year, the government planned to “introduce an Islamic finance centre that will not only provide offshore Islamic financial services, but this centre will act as the Islamic finance hub for the whole South Asia region.”