The banks were urged to show restraint and downsize, and to follow that up, the Central Bank specifically collected information from them on their downsizing efforts. They realised, of course, that they were in a tight position, and they responded by selling assets and discontinuing selected activities in a number of countries, among other things. Kaupthing Bank’s decision to abandon its plans to acquire NIBC in the Netherlands was very important in this regard, not just for Kaupthing itself but for all of the banks. The Central Bank supported all of these actions wholeheartedly; however, it did not have the statutory authority power to force the banks to change their conduct. It is known that the Central Bank expressed its growing concern over the position of the banks during meetings with governmental authorities. Early last year, the Central Bank’s concern centred not least on the banks’ large near-term refinancing requirement for the coming years, which I have already mentioned, and the opinion, expressed by leaders of a number of international banks, that the global credit crunch was unlikely to ease in the foreseeable future. The Central Bank feared that credit markets could remain closed to Icelandic banks for some time to come. Although various explanations have been given for the swift rise in the Icelandic banks’ CDS spreads, first in early 2008 and again that summer, it is perhaps possible to claim that the most important explanation lay in growing scepticism about the banks’ ability to obtain the medium-term funding they needed for refinancing purposes.
It therefore represents an enormous potential market that remains yet untapped. Takaful operators assume an important role as economic or financial agents as they essentially mobilise long-term funds in the form of contributions and invest them in the available Islamic investment avenues. As custodians of public funds, takaful operators must ensure that the takaful funds are invested in compliance with Shariah and are soundly managed to instil public confidence. For the takaful industry to be developed into a viable alternative to the more entrenched conventional insurance industry, the need for it to be supported by the core components of a comprehensive Islamic financial system cannot be over-emphasised. As takaful operators are both mobilizers of long-term funds and fund managers to the policy holders, their ability to generate returns to fulfil the obligation to the policy holders depends very much on the range of financial instruments available in the market place. Without an effective financial system, takaful operators may not be able to perform as effectively and as efficiently in terms of delivering their promise on the profit sharing basis and to be able to keep pace with their conventional counterparts in the area of fund performance. In the absence of a viable Islamic capital market, there would not be an adequate supply of quality financial instruments for which the takaful funds can invest. It may have to depend on low yielding returns from bank deposits.