The Islamic Financial Services Board (IFSB) has issued its Working Paper (WP) on the “Evaluation of Core Principles Relevant to Islamic Finance Regulation”.
The WP was issued in parallel to the Exposure Draft (ED-17) of the Standard on Core Principles for Islamic Finance Regulation (Banking Segment), and provides the background and wider context for the Standard being prepared by an IFSB Working Group.
The WP assesses in full the Core Principles issued by the Basel Committee for Banking Supervision (BCBS), the International Organization for Securities Commissions (IOSCO), as well as those issued by the International Association of Insurance Supervisors (IAIS).
Mr Jaseem Ahmed, IFSB’s Secretary General, said: “The key objective was to analyse the applicability and relevance to the prudential regulation and supervision of Islamic finance of the Core Principles of the international standard-setting bodies for conventional financial system.”
In particular, the WP provides a principle-by-principle gap analysis of these Core Principles and explains whether the existing principles are fully applicable, they require modifications or adjustments, or new principles are needed.
“The analysis indicated many areas of relevance, but it also underscored the importance of having additional principles to cater for the specific nature of products and the balance sheet structure of institutions offering Islamic financial services (IIFS),” Mr Jaseem added.
Core Principles for various sectors in the financial system have become a standard tool to guide regulators and supervisors in developing their regulatory regimes and practices. They also serve as a basis for assessing the strength and effectiveness of regulation and supervision by either the regulatory and supervisory authorities themselves, or by the external parties such as the International Monetary Fund and World Bank under their Financial Sector Assessment Programme (FSAP).
In this respect, in addition to the Core Principles of the three major international standard-setters – the BCBS, the IOSCO and the IAIS – Core Principles are also available for deposit insurance, financial market infrastructure and financial conglomerates, among others.
It is expected that Core Principles for Islamic Finance Regulation will facilitate the work of supervisory authorities that are new to the regulation and supervision of Islamic financial services and who face challenges in identifying applicable principles and benchmarks for assessing the gaps in their existing regulatory policies and regulations, while addressing the specificities of Islamic finance. The differences in the operational and Shariah characteristics of Islamic finance products in various jurisdictions highlight the need for international standardisation of the prudential framework.
To study existing global Core Principles and prepare a new standard on IFSB Core Principles for Islamic Finance Regulation, the IFSB Council in 2012 approved the establishment of a Working Group for this purpose. Due to the relative size and significance of Islamic banking sector, the Working Group agreed to initially focus on developing Core Principles for Islamic banking, with an aim to subsequently develop Core Principles for the other sectors of the Islamic financial services industry.