Global standardization should be the vision of the Islamic finance industry. If the world could come up with Basel I, Basel II and Basel III, why can’t the Islamic finance industry come up with Mecca 1, Mecca 2 and Mecca 3?
I am not sure that one can ever get true standardization. There can be many areas of convergence, but there will always be a reason why one market, one country, one province, one municipality wants or needs to do things in a different way. I was once asked by the head of real estate at a major European bank’s New York branch why the Muslims couldn’t “get it together and have a single standard to make life easy for everyone?” I asked him two questions, which eventually left him flummoxed: “Do you lend against California real estate?” To which he answered in the affirmative. “But, California has a unique real estate lending law and debtor protections that do not exist in 48 of the other 49 states, doesn’t the absence of a single US real estate mortgage standard bother you?” I then asked why a mid-sized country like the UK had four distinct mortgaging laws, and one couldn’t take an English mortgage and assume that it would work flawlessly in Wales or Scotland? Stunned silence.
Turning the question to regulation, I think that diversity is better than uniformity. The law of unintended consequences arising from Basel and its ‘one size fits all’ approach is likely to reduce credit. This will, of course, hamper growth. I stand firmly alongside Peter Sands, the CEO of Standard Chartered, whose quote of the 15th June 2012 in the Financial Times queried whether Basel III would harm banks and trade in emerging markets. More capital is important; managing liquidity and seeking to nip liquidity events in the bud is critical; and increasing the volume of liquid/tradable assets is good. Yet, diversity by type of institution, geographic region and size may be more critical. And, let’s not forget that whatever bad things bankers did from 2002 to 2008, some very prominent regulators with some very good laws and regulations seemed disinclined to act. On the one hand, I like the analogy of a new disease entering a genetically uniform population —the systemic risk is huge. The uniform application of Basel may be exposing us to a greater, future systemic risk. On the other hand, whether it is Basel or any other rule, the regulator truly needs to be vigilant and prepared to intervene aggressively. I suppose that makes the regulator the front line clinician.
More capital, better liquidity monitoring, more liquidity management tools, rules tailored to specific types of institution or market, and tougher regulators: yes. One size fits all: beware.
CEO & President, SHAPE Financial Corp.
Chairman, president & CEO, Edbiz Consulting