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Islamic bank system remains sound    
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The Bank Islam HQ in Kuala Lumpur

SETBACKS such as the recent losses incurred by Bank Islam Malaysia Bhd will not affect the Islamic banking sector, as Malaysia's Islamic banking system is still very sound, said Dr Mohd Ishak Ismail, the chief executive of Malaysian Institute of Corporate Governance (MICG). He said the integrity of a system would not be affected by a “minor” setback such as this, noting that apart from the sound Islamic banking system there was also good supervision of the industry.

“Bank Negara, the Securities Commission and Bursa Malaysia have played their regulatory roles effectively,” he told Bernama.
Mohd Ishak said this scenario signalled a bright prospect for the domestic Islamic banking industry. He said Bank Islam's losses “could have happened because of factors beyond the jurisdiction of the bank's management and the industry's watchdog.”

Bank Islam, Malaysia's pioneer in Islamic banking, incurred a loss of RM456mil for the year ended June 30 – its first loss in 22 years of operations. The loss surfaced following the commitment of the new management team to handle the bank's non-performing loans (NPLs) more proactively. Most of the NPLs resulted from the 1997/98 financial crisis.

Some industry players are puzzled why the big losses incurred by Bank Islam were not detected much earlier, amid the notion that the financial mishap does not make a dent on the overall Islamic banking industry. They were curious about how the various loans given out and the high level of NPLs, which had been recorded at Bank Islam's outfit in Labuan, could have passed through the industry watchdog when the bank presented its financial account. This raised questions on whether the accounts were not properly disclosed or there was a “short sight” on the part of the industry watchdog.

Prof Bala Shanmugam, Monash University Malaysia's director of banking and finance, said Islamic banking, just like any business, was constantly exposed to risks, but the banking system and industry regulations were perfectly in place to detect any irregularities. However, he noted that there was no early warning at the Bank Islam level or from the industry watchdog on the huge loss occurred in the past several years until it was revealed by the bank's new management. “It's really surprising that this situation was highlighted much earlier,” he said. – Bernama

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