Moderator Abdulkader Thomas started the session by asking Michael Zamorski for his opinion on the lessons learnt from the credit crisis and the problems affecting the global financial market today.

According to Zamorski, regulators and boards of directors need to know that they are getting clear information of what the risk tolerance and risk capital is and ensure that it is consistent with their overall view on the risk capital of the firm, and what is best for the long-term welfare of shareholders and stakeholders. Secondly, the credit decision should be based on a reasonable capacity to repay.

Abdulkader said during the Asian financial crisis in 1997/98, western rating agencies took a lot of heat. He then asked Razlan Mohamed whether the rating agencies in Malaysia have strengthened since the crisis and if they are better prepared now and learnt their lesson to protect investors.

According to Razlan, international rating agencies underestimate the significance of correlation. This correlation of one event, which has affected all single borrowers, is too great.

When Islamic finance practitioners offer Islamic products in the spirit of Islamic finance, there should not be any speculation or exploitation in either party as to the provision of financing.

Razlan said Malaysia’s bond market, which is relatively new, did not leverage on its financial system and did not go into complex derivatives structures.

Abdulkader then asked Indri Pramitaswari on the highlights of Indonesia’s new Sukuk and whether it took into account some of the issues, particularly the Asian financial crisis, to help protect the economy.

She said in learning from the crisis, Bank of Indonesia has been issuing new regulations and providing “retooling” for domestic banks and these include increasing the capital adequacy ratio, minimum amount of the paid-up capital of banks, reducing the number of non-functional banks and complying with the Basel II requirement.

With regard to the state Sukuk law, it is targeted for Sukuk issued by the government. Under the new law, some new concepts which were not in the previous Indonesian legal system have been introduced. First, there is now separation of beneficial title and legal title. Under this new law, the government is given the right without actually transferring the legal title of the asset underlying the Sukuk. Secondly, a concept of special purpose vehicle (SPV) has also been introduced. Until this regulation, Indonesian law did not recognize the concept of SPV.

Abdulkader then sought Dr Mohamad Akram Laldin’s view on whether or not Shariah providers with the additional risk management tools might be helpful in the light of the future of the potential economy or financial system.

According to Akram, a person must take all the precautions to prevent harm before leaving it to fate and this is very much in line with the principles of the Shariah. Planning in order to mitigate risk, whether Shariah risk, credit risk and legal risk, all are in line with the requirement of Shariah.

Responding to Abdulkader’s question on whether the Dubai International Financial Centre (DIFC) has factored in this challenge in balancing Shariah contract in an English law jurisdiction, Zamorski said DIFC, the financial services of which are overseen by the Dubai Financial Services Authority, has a unique regulatory structure for Islamic finance and does not regulate the religious aspect.

Pramitaswari said in late 2005, Indonesia enacted a law which basically said that the religious court had the jurisdiction to review cases related to Shariah economy, essentially Islamic finance. Since then, the republic has not seen any cases instituted in the religious court.

Wrapping up the session, Dr Abdul Raman Saad said standardization of and consensus on the regulation of Shariah rulings by experts and advisers among different countries to reduce potential Shariah arbitrage would augur well for bankers and investors.

As far as Malaysian courts are concerned, although there is a move to create a civil court, what’s important is that judges must understand the fundamentals of Islamic financial transactions.