PARIS -(Dow Jones)- Western banking authorities need to tackle a number of issues before licensing Islamic banks, in order to ensure a smooth interaction with the rest of the banking systemand preserve financial stability, European Central Bank Governing Council member Christian Noyer said Tuesday at a conference in Paris.
"Banking authorities need to ensure that islamic banks will interact with their conventional environment in France as soundly as possible," Noyer said at a conference organized by Euromoney onIslamic finance.
Noyer, who is also governor of the Bank of France, cited in particular the need to clarify the governance of Islamic banks and the role of their 'shariah boards,' as well as liquidity management issues and the access of Islamic banks to the Eurosystem funding.
Although it is hard to say whether or not Islamic finance is in itself conducive to financial stability, Noyer noted Islamic banks pose specific risks to the financial system because of the way they operate, which differ from risks presented by conventional banks.
Islamic banks face specific obstacles in liquidity management because the prohibition of interest under Islamic rules has led to the underdevelopment of funding sources, he said. The lack of product standardization as well as the lack of harmonization of Islamic standards, which depend on the interpretation of Shariah scholars, create operational and legal uncertainties.
His remarks come after France recently enacted a number of legal and regulatory changes to foster the development of Islamic finance in the country, and thus grab a slice of the fast-growing Islamic finance business which still essentially goes to London in Europe.
-By Nathalie Boschat, Dow Jones Newswires; +33 (0) 1 40 17 17 40; nathalie.boschat@dowjones.com
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