He is a well-known and highly respected banker in Saudi Arabia. When he speaks, his words get total attention from the who's who in the industry to the men in government and bureaucracy. Abdulrazzak M. Elkhraijy is an expert on the burgeoning concept of Islamic banking. He has more than 30 years of experience in the field having joined the National Commercial Bank, which is the Kingdom's oldest and largest bank by market capitalization, in 1980 as a management trainee. He holds a bachelor's degree in economics and business from Macalester College, St. Paul, Minnesota, and is currently the executive vice president and head of Islamic Banking Development Group at the NCB. In an exclusive interview with Khalil Hanware of Arab News, Elkhraijy talks about the contribution of and the role that Islamic financial services can and is playing in stabilizing the creaking and faltering global financial system.

Abdulrazzak M. Elkhraijy's extensive career took him to various positions and areas of responsibility within the NCB Group; working as deputy and branch manager in various locations in Jeddah from 1982 until 1985, and in 1985 he was promoted to the position of branch manager at Jeddah's main branch, one of the most important positions in the bank. Between 1987 and 1994, Elkhraijy was elevated to the position of acting and regional manager for the Western and Eastern Regions, and in 1994 he was made deputy head of the Islamic Banking Division (IBD). As deputy head of IBD, Elkhraijy was responsible for setting up its business strategy, new product and service development in addition to determining the suitability of investment opportunities for the assets that were under management and being the head of Islamic Credit Committee.
In 1998 he was made the head of IBD, a post he held until 2004. During his tenure, he managed and boosted IBD by converting individual and regional branches to Islamic banking, introducing first capital preserved funds, guidelines for Islamic equity investment and the launch of the first Islamic credit card. Moreover, he introduced a range of new innovative Islamic funds that helped propel NCB to become the leader in diversity and size of its portfolio of Islamic funds.
As a result of the merger of the retail division and the Islamic banking division, the Islamic Retail Banking Division was born and Elkhraijy was its head from 2004 until 2006. In December of 2006, he was made head of the Islamic Banking Development Group which was charged with overseeing all aspects related to Islamic banking at NCB divisions and some of its subsidiaries.

Following are excerpts from the wide-ranging interview with him:

There is this view that the Islamic financial services industry is helping to enhance the resilience and stability of the global financial system. Are you in agreement with this view?

Yes, I do. The Islamic financial industry is certainly contributing to strengthen the global financial system. The industry has provided a viable alternative financial system with new rules and standards to ensure its sound governance. However, what is more important to understand is the very basics of Islamic banking which have the potential to contribute toward financial and economic stability of any economy. With close linkages between financial transactions and the real economic activities, Islamic finance is helping to bring back the much-needed resilience and stability of the global financial system. The value of Shariah-compliant assets globally has grown by more than 20 percent to reach an approximately $ 1.2 trillion industry. The sukuk market has surpassed $ 100 billion and is doing well in 2012 up till now, thus providing the much-needed succor to the global financial system. In general, Islamic banks have grown faster than their conventional counterparts. This has been possible due to the strong ethical foundations of the Islamic banking industry. As you are aware, Islamic banking follows certain strict ethical principles such as (i) avoidance of riba and prohibition of making money from money; (ii) avoidance of speculative and gambling based transactions (mayseer); (iii) avoidance of significant contractual uncertainty (gharar) in dealings; and lastly (iv) avoidance of Shariah-prohibited activities such as dealing in alcohol, drugs, armaments, etc. and "not to sell what you do not own." These noble ideals of Islamic banking have served to protect the customer, the bank, the economy and the society at large.
They say that the Islamic financial industry lacks regulations. What is your take? Is there a need for a strong regulatory oversight for Islamic financial services industry and related capacity building?

It is unfair to say that the industry lacks regulations. My view is that the industry does have rules and regulations, but these may not be as matured as their conventional counterparts have. Various central banks and standard setting bodies like the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB) and the International Financial Market (IIFM) have developed quite a few standards and are working hard to put in place the remaining standards and regulations to regulate the industry. There are also country-specific laws and regulations governing Islamic banking. Some countries, such as Malaysia, have a highly developed regulatory framework for Islamic banks. It is to be noted that various countries have taken different approaches, with some establishing regulations at the onset of introducing Islamic banking, such as Oman, and others taking a more hands-off approach and extending or enhancing the existing conventional regulatory system to apply to Islamic banks as well. In addition, each and every bank like the NCB have their own rules and regulations concerning management of Islamic banking portfolio in their respective banks. This includes conformity to the rules of Shariah which ensures that all the Islamic products and services launched in the market should strictly conform to the tenets of Shariah as derived from Qur'an and Hadith. Regarding the need for a strong regulatory oversight for the industry, my view is that it is necessary now more than ever before since the industry has grown big and transcended several jurisdictions. The industry is faced with problems of standardization and lack of single body to pronounce and enforce Shariah guidelines. There is no compulsion in adopting and applying the Shariah standards. Different interpretations of Shariah law are posing difficulties when structuring deals, particularly across jurisdictions. Also, there is a need to bring in harmonization between the Shariah law and Common law in various jurisdictions that the industry is operating in. Hence, there is a need to clearly define the rules and regulations governing this industry both in Shariah and matters of general rule to protect the interests of financial institutions as well as the investors and other participating entities. In order to do that, needless to say, collaboration among industry players, capacity building, skills and knowledge acquisition are of paramount importance or else how will the industry develop further?

So there is a need for structural reforms that can assist reducing pro-cyclicality in the financial system and make it more resilient to the external shocks?

This is what many leading economists have been saying. I agree that there is a need for structural reforms that can assist in reducing pro-cyclicality in the financial system and make it more resilient to the external shocks. Recent turmoil in global financial markets and the subsequent collapse of many banks and financial institutions in the West have highlighted the importance of systemic events that illustrate the disruptive effects of pro-cyclicality. What does it mean? In simple terms, pro-cyclicality refers to the mutually reinforcing relationship between the real economy and the financial system. It is only natural that in times of economic expansion and prosperity those banks tend to expand lending, while in times of economic contraction banks tend to similarly contract (reduce) lending. Bank policies including that of loss provisioning need to protect against excessive risk taking in times of prosperity and excessive contraction in times of economic difficulty. Hence, I agree that structural reforms and policy adjustments need to be done to reduce the pro-cyclical behavior of financial intermediaries and risk-taking abilities.

You think new standards and guiding principles in Islamic finance will endeavor to strengthen the basis for market development and to spur the development of new Shariah-compliant instruments?
Yes, to a large extent. It is not only important to develop new standards and guiding principles but also to adapt and implement it truly in letter and spirit. The combined effect of this will result in growing the industry further. In this context, I am looking forward to more research in Shariah and its application in modern banking so that the combined effect of this will see introduction of efficient products with greater conformity to Shariah in its essence and implementation.

The World Bank has taken initiatives to support and enhance the capacity-building and research in the Islamic finance. What, according to you, can these initiatives be?

It is indeed heartening to see greater interest and involvement of world bodies such as the World Bank and the International Monetary Fund (IMF) in collaborating with Islamic finance industry bodies and banks in general to establish various prudential standards and institutional framework to govern the industry. As you know, the World Bank has declared Islamic finance as a priority area since there is a need to strengthen the foundations of Islamic financial system both in terms of implementing Shariah standards as well as in terms of establishing prudential standards so as to prevent the occurrence of another financial crisis. I would like to mention the views of the World Bank as articulated in a recently-held conference at Harvard, the following essential foundational issues and challenges need to be addressed to facilitate the growth of Islamic banking. These challenges are: (i) improving the regulatory framework; (ii) the need to rebalance tax treatment for Islamic bank transactions; (iii) the need to improve exit rules in the event of insolvency and default; (iv) the need to ensure adequate liquidity; and (v) the need to establish sound risk management standards specific to the practice of Islamic banking.