Thought leaders and key players in the Islamic financial services industry (IFSI) shared their views on the industry’s regulatory and supervisory issues at the 12th Islamic financial Services Board (IFSB) Summit, with its theme of “Core Principles for Islamic Finance Regulation: Integrating with the Global Regulatory Framework”. The Summit was held on 20 and 21 May in Kazakhstan.
Trends in Islamic financial services
Speakers at the first session, titled “Global Overview of the Islamic Financial Services Industry”, said that new initiatives by policy makers globally to strengthen the legal and regulatory frameworks in Islamic finance will help improve the performance of the IFSI.
Dr Ishrat Husain, Former Governor of the State Bank of Pakistan and a founding governor of the IFSB, touched on the progress made by the Board in the issuance of standards, including the Core Principles for Islamic Finance Regulation (CPIFR). Together with other speakers, he stressed key policy issues such as challenges with regards to safety nets, liquidity management and the macro prudential policy framework, as well as tax policy. Addressing these challenges will require concerted efforts by various stakeholders, including national governments.
Mr Ananthakrishnan Prasad, Mission Chief, Middle East and Central Asia Department, International Monetary Fund (IMF) said that sukuk could play an important role in financing infrastructure, and that Islamic finance could assist in bolstering financial stability. However, significant gaps remain in legal and regulatory frameworks.
Speakers also highlighted the measures needed to support the growth of Islamic finance in CIS countries and other regions. These include, among others, enabling regulatory frameworks as well as access to qualified and skilled human resources. There was also a consensus on the need for a surveillance framework for Islamic finance and, in this regard, the role of the CPIFR as the basis for the next phase of the Islamic finance industry development becomes more pertinent and relevant.
Impact of regulatory developments
Speakers at the second session on new regulatory developments and the impact on IFSI focused on the implementation of new IFSB standards on liquidity and capital adequacy that complement the global regulatory reforms in these areas.
In this respect, speakers outlined the key features of Shariah-compliant Additional Tier 1 and Tier 2 capital instruments and macroprudential policy tools which have been prescribed in the IFSB’s Revised Capital Adequacy Standard. There was a consensus that new liquidity ratios, such as the liquidity coverage ratio and net stable funding ratio, pose major challenges for the industry due to the scarcity of Shariah-compliant high-quality liquid assets in most jurisdictions.
However, Mr Jaseem Ahmed, Secretary General of IFSB noted that the Board’s dialogue with the Basel Committee had resulted in the recognition of the need to provide flexibility to Islamic finance jurisdictions. This is reflected in IFSB’s Guidance Note 6, Quantitative Aspects of Liquidity Management, where regulatory authorities can exercise their judgement, within specific parameters, on the specification of level 1 and level 2 assets.
The speakers noted that while the Islamic finance community has made some important strides, more work needs to be done to achieve an appropriate balance between preserving the safety and soundness of the financial system and allowing financial institutions and markets to perform their intended functions. Additionally, the capacity-building needs of the industry players and their regulators, which is essential for the industry to meet the growing demands posed by regulatory changes, require greater attention.
Core principles
Speakers at the session on the core principles of Islamic finance in enhancing regulatory consistency explicated the need for a minimum international standard on the key principles of sound regulatory and supervisory practices to promote effective supervision of IFSI institutions. In this regard, they lauded the efforts of the IFSB in issuing its CPIFR in April 2015.
It was noted that the CPIFR had taken on board, without amendment, only nine of the 29 revised Basel Core Principles. Basel’s Core Principle 23 for interest rate risk had been dropped, as it was not applicable to Islamic finance, and four additional Core Principles had been provided, covering such issues as the Shariah governance framework and windows.
In line with the CPIFR, the speakers stressed that certain necessary measures have to be taken by regulatory and supervisory authorities in order to bring the IFSI to the next level of development by enhancing consistency, not only in supervision, but also in the implementation of global standards across borders.
Delegates were also updated on the work of the regulatory and supervisory authorities on identifying the necessary changes, as well as measures undertaken, in local regulations in complying with the CPIFR. This was complemented by updates on the current Islamic finance infrastructure, its future plans and outlook in Turkey and the Gulf countries, with a special focus on Qatar.
An enabling framework
In the session on a framework for the assessment of regulatory regimes, speakers stressed, amongst other issues, the importance of an enabling environment and the need to facilitate the development of a surveillance infrastructure for Islamic finance.
Dr Ishrat Husain, Former Governor of the State Bank of Pakistan and Dean of the Institute of Business Administration proposed a 12-point agenda for creating an enabling environment. This included policy commitment at the national level, the need for a comprehensive legal framework that could effectively cater to the specificities of the IFSI, the need for inexpensive dispute resolution mechanisms, attention to consumers and depositors’ protection, and regulations to address insolvency and taxation regime issues.
Mr Bakarudin Ishak, Assistant Governor with Bank Negara Malaysia, presented the country’s consistent and pragmatic approach towards developing a robust IFSI, by having a well-connected Islamic finance ecosystem to ensure sustainable industry growth. This is supported by institutional development through a diversified range of IFSI institutions, dedicated legal and Shariah-compliant frameworks, the central bank’s active role as the lender of last resort, creation of an Islamic money market and secondary market for sukuk infrastructure, and initiatives to disseminate knowledge and raise awareness about Islamic finance among industry practitioners and the public.
Mr Bakarudin also shared the salient features of the new Investment Account Framework in Malaysia, which is supported by an enabling regulatory regime as well as an industry-led initiative on an Investment Account Platform that aims to facilitate its efficient operationalisation by linking investors with prospective ventures. The speakers proposed that regulators and supervisors be more proactive in adopting the standards issued by the IFSB and other standard-setting IFSI bodies.
Silk Road opportunities
Debating the challenges and opportunities of the New Silk Road and emerging Islamic finance jurisdictions, panellists at the final session of the Summit looked into the importance of regulatory cooperation in developing the IFSI in a manner that promotes cross-border integration.
There are parallels between the old Silk Road and modern Islamic finance, with both primarily guided by the development of new products and search for new markets, and requiring unprecedented collective efforts by different markets, said Dr Hamed Hassan Merah, Secretary General of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
In the case of modern Islamic finance, global interaction of markets across different regions is driving its growth and wider acceptability, he added in his keynote speech.
Dr Merah said lessons from the old Silk Road, especially in terms of economic relationships, societal developments and political will, can benefit Islamic finance in a number of ways. This includes ensuring that the products are safe and of high quality, building an enabling environment for the growth of Islamic finance while protecting its integrity, and the necessity of global collaboration.
The 12th IFSB Summit was attended by key global IFSI leaders from among regulatory and supervisory authorities and financial institutions from 28 countries, international multilateral agencies such as the Islamic Development Bank Group and IMF, and the local Kazakhstan financial community.