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Bahrain eyes ‘reinvention’ of Sharia finance

Thursday 25 November 2010 - by Will Henley

The Central Bank of Bahrain has called for the "reinvention" of Islamic finance as it suggests that smaller players may be squeezed out of the US$1tn market as regulatory standards tighten.

Governor Rasheed Al-Maraj told the 17th annual World Islamic Banking Conference in Bahrain that Sharia compliant institutions must rethink their business model as credit and growth levels enjoyed prior to the 2007-8 crisis are unlikely return.

"It is no longer wise to base business models on the hope that the era of cheap and plentiful liquidity will soon return," Al-Maraj said, noting that his bank would place greater emphasis on these models in its supervisory assessments.

The governor predicted that there would be fewer opportunities for "smaller niche players" as he warned that the Basel III accord on higher capital ratios will place limitations on institutions' use of leverage.

"Larger, more broadly-based financial institutions will be key to the emergence of an industry with more sustainable business models," he asserted.

Al-Maraj also claimed that Islamic banks will need to focus on revenue diversification and "unglamorous" activities such as asset management and advisory services.

"Islamic financial institutions need to build diversified sources of revenue, relying not only on placement and performance fees, but also on the steady stream of income generated by such an unglamorous but essential activities as advisory services, asset management, and providing financial services to retail clients."

"By now it should be clear that there can be no return to business as usual."

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