As the dust settles after the financial crisis it has become increasingly clear that there will be no return to business as usual for the financial industry, said a top government official.

Rasheed Al Maraj, Governor of Central Bank of Bahrain, was addressing delegates at the opening of the seventh annual Islamic Finance Services Board (IFSB) meeting at the Ritz-Carlton Bahrain Hotel and Spa in Bahrain yesterday (May 4).

"In the advanced economies, there is a determination to make sure that there is no risk of a repeat of the crisis and in practice this means financial institutions will be smaller and less profitable than in the past," he said.

"Governments, central banks and regulators around the world are now busy constructing a new financial architecture.

"New institutions and new regulations are being put in place. The structure of the financial industry itself is open to review, with some distinguished people questioning whether it is desirable to allow the combination of commercial and investment banking.

"Some fundamental questions are being asked about the type of financial system that can best serve the economic needs of society.

"The Islamic financial industry cannot stand apart from these developments," he said.

"The fundamental question that the industry now needs to ask is to what extent has the global financial crisis been a game changer for Islamic finance as well as for conventional finance?

"The issue is not whether the Islamic financial industry needs to learn lessons from the crisis, but what lessons it should learn and how it needs to adapt in the light of lessons learned from the crisis.

"In the early days of the crisis, there was a widespread assumption that Islamic finance would continue this strong growth into the future," he added.

"The view of many people in the industry was that it was not at risk from the crisis. I never shared that point of view. I was not convinced that the Islamic financial industry could avoid suffering some fallout from the worst financial crisis in several generations.

"Therefore, I argued in a number of speeches last year that it is important that the Islamic financial industry learns lessons from the crisis and that it amends its business practices accordingly. Recent developments have provided more support for this conclusion," he said.

"In the past 12 months, we have seen the first defaults by issuers of sukuk. These defaults have raised many complex legal questions about the rights of sukuk holders, for example, whether they have the right to take ownership of the underlying assets in the event of the issuers' default.

"Until these legal questions are resolved, there will be a long shadow over the sukuk market, and we have already seen the impact in terms of the volume of new issuance.

"The further development of this market depends on finding legal certainty and developing mechanisms to deal with issuer defaults," he added. – TradeArabia News Service