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What European banking changes could mean for Islamic banks

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Make no mistake; the Islamic banking industry faces big changes ahead. What seems like some minor ructions in a far away market are likely to have long and lasting impacts on the global banking industry – and the Islamic banking sector will not be immune.

Amidst the economic turmoil that is roiling many economies of Europe comes a plan to make European banks ring fence their trading assets thanks to the Liikanen review (so named because the review committee is chaired by the Finn Erkki Liikannen)

The Liikanen review is not yet complete but it seems certain that some form of hybrid model between the US and the UK approaches to banking reform will be promoted by the review.

The US approach (the Volcker approach) is to outlaw proprietary trading – essentially using the bank’s own balance sheet to play the market while the UK approach (the Vickers approach) basically says no single bank can operate as both a retail bank and an investment bank under the same roof. The Liikanen review seems certain to cherry pick the best of both approaches and this will help define the roadmap for European banks.

The global banking industry is – as banks have discovered over recent years – really just one big global village and this means that the rules that are adopted in Europe are likely to impact on the thinking of central banks throughout the Muslim world too.

This is likely to mean that the central banks of the Gulf and Asia will be looking closely at what the Liikanen review concludes with a view to seeing where the suggested new rules can be applied at home.

To date there have not been many instances of Islamic banks dabbling in both investment banking and retail banking – with a few, large, exceptions – but the issue of proprietary trading of Islamic banks presents a different picture altogether.

The moves that we have seen to date are certainly fostered by the wishes of governments around the globe to be seen to clamping down on ‘bad’ bankers but this is likely to mean that we will see a much healthier level of regulation and oversight overall. This might prove to be uncomfortable for the Islamic banking industry but it will make it a stronger and better place in the long run.

As the shine seems to be coming off the emerging Chinese economy is seems likely that the world’s eyes will turn back once again to the old stalwarts of the oil producing countries of the world for a new growth engine. This could be the fillip that a newly energised, better-regulated Islamic banking space has been searching for over the past few years.