Islamic Financial Services Board needs to apply bolder approach

Islamic Financial Services Board needs to apply bolder approach

Mushtak Parker Saudi Gazette Available at:

LONDON– The Islamic Financial Services Board (IFSB), the prudential and supervisory standard setting body for the global Islamic financial services industry, celebrates its 10th anniversary in 2013. Today, the IFSB is a far cry from those early days in March 2003 when it started operations at its headquarters in Kuala Lumpur with Prof. Rifaat Abdel Karim at its helm as its inaugural secretary-general.

While his successor, Jaseem Ahmed, a former senior executive at the Asian Development Bank, who took over in April 2011, is trying to stamp his own style and vision on the multilateral organization building on the achievements of the past decade, it is clear that the latter still has several major challenges ahead to help facilitate an orderly and holistic development and integration of the global Islamic financial services industry.

It remains a moot point whether the IFSB is perceived to be constrained by its mandate, which is to introduce prudential and supervisory standards, guidelines and practice notes for the global Islamic finance industry in consultation with various stakeholders to promote its orderly and sound development and thereby contributing to financial stability and economic growth.

But to pursue an agenda relating to prudential and supervisory standards seemingly detached from the regulation, authorization, monitoring and enforcement of Islamic financial institutions (IFIs) in member jurisdictions per se is inexplicable because in today’s globalized world they are inextricably linked to each other.

What the IFSB must not do is to behave as if it is a mere multilateral political organization dabbling in passing with financial sector prudential standard setting matters. Financial sector prudential and supervisory standard setting, as other functions relating to the sector, has to be seen to be above politics, national interest and petty nationalisms.
Otherwise the exercise becomes compromised at the onset and the achievements and progress similarly stunted.

This is where character, political will and a thought provoking focused plan of action come into play. The onus is not only on the senior management but perhaps more importantly also on the Governing Council of the IFSB, which met in Jeddah recently and appointed Abdullah Saoud Al-Thani, Governor of Qatar Central Bank (QCB), and Mohammed Rosli Sabtu, Managing Director of Autoriti Monetari Brunei Darussalam (AMBD), as Chairman and Vice-Chairman of the Council for 2013 respectively.

The IFSB has accomplished a lot, but it needs to use these achievements to consolidate its future strategy with a much more urgent and bolder approach, even at the risk of upsetting some of its members.

Its achievements are in some respects understated because they do not necessarily translate into instant headline grabbing or immediate impact initiatives given the nature of standard setting.

In December, for instance, the Council of the IFSB at its meeting in Jeddah hosted by the Islamic Development Bank (IDB) admitted eight new members into the organization.

This, according to the IFSB, brings the total membership of the Board to 184 members comprising 55 supervisory and regulatory authorities from the banking, capital markets and Islamic insurance (takaful) sectors in 41 jurisdictions, as well as eight international inter-governmental organizations, and 121 market players (financial institutions, professional firms and self-regulatory organizations).

The newly admitted members include the Capital Markets Authority, Kuwait and the National Insurance Commission, Nigeria as Full members; and the Financial Reporting Foundation, Malaysia, Prudential BSN Takaful Berhad, Malaysia, Safran Stratejik Yonetim ve Teknolojik Danismanlik Hizmetleri Ltd. Sti., Turkey, the Central Bank of the Turkish Republic of Northern Cyprus, Standard & Poor’s, Singapore, and the Gulf Bond and Sukuk Association, United Arab Emirates as Observer members.

In fact, the IFSB has managed to do far more to promote the internationalization, the demystification and the market education of Islamic finance among central banks and regulatory authorities, multilateral organizations such as the World Bank, the International Monetary Fund (IMF), the International Finance Corporation (IFC), the Basle Committee, and the International Organization of Securities Commissions (IOSCO), and other institutions in the space of a decade than the industry per se has managed to do in its three or so decades of contemporary existence.

And yet even here there remain huge gaps. For instance many central banks or regulatory authorities from the 56 Organization of Islamic Cooperation (OIC) countries are yet to become members. Some prominent regulatory authorities are merely Observer members as opposed to Full members. These are revealing organizational nuances, which affect the very structure of the Board. There are those who question the current organizational model of the IFSB, which seems to have a perennial resource problem. They would prefer the organization to adopt an equity with concomitant voting rights structure, which could give it more resource stability and therefore operational efficacy.

Similarly, the IFSB could hand hold new markets and entrants to Islamic finance by issuing a definitive Islamic Banking Authorization Standard.

Take the case of the Central Bank of Oman, for instance, which oddly is an Observer member while the Capital Markets Authority of Oman is a Full member of the IFSB. The sultanate, following the promulgation of a Royal Decree No 69/2012 issued on Dec. 6, 2012 by the Omani Ruler, Sultan Qaboos Bin Said, officially introduced Islamic banking into the local market on Dec. 8 by “amending some provisions of the Banking Law issued under Royal Decree No 114/2000” and adding “a new Title Six – Islamic Banking” to the said law.

The Royal Decree No 69 became effective as soon as it was published in the Official Gazette No 993 two days later. This means that banks in Oman, hitherto the only Gulf Cooperation Council (GCC) country not to have introduced Islamic banking in its jurisdiction, can now offer Islamic banking products to customers and businesses subject, of course, to the approval from the CBO.

However, even the IFSB admits that the best way to facilitate Islamic banking in a jurisdiction is through the adoption of a dedicated stand alone Islamic Banking Law which takes into consideration the specificities of Islamic banking principles. Yet key members continue to ignore this because they perceive Islamic banking as a mere niche market segment or others still perceive Islamic banking as a mere product offering for which it would suffice for the risks and marketing to be managed and regulated.

Asked “why has the Central Bank of Oman decided to go down this route by amendments to the existing law instead of trying to adopt a new dedicated Islamic banking law”, Hilal Ali Saud Al-Barwani, Deputy Governor and Vice President, Banking Control and Legal Department, Central Bank of Oman, told the Saudi Gazette that it was “really a question of speeding up the process, so it’s expediency. We believe the conventional banking law covers a number of things. So it was only a question of adopting articles specifically for the Islamic banking sector.” Al-Barwani also suggested that Oman may adopt a dedicated Islamic banking Law in the future as the industry settles down and grows.

The point here is that if the IFSB had an Authorization Standard in place it could have helped its members such as Oman to start off on the right track with its legal framework instead of delaying it to the future. Surely this would contribute as much to market perception, certainty and confidence as would purely prudential and supervision standards whether on risk and liquidity management, insolvency measures for both IFIs and takaful companies, Shariah standards, etc.

In fact, IFSB Secretary General Jaseem Ahmed, at the 9th IFSB Annual Summit in Istanbul in May 2012, alluded to the fact that underdeveloped enabling environments, weaknesses in the risk and liquidity management infrastructures within Islamic financial institutions (IFIs), the lack of greater consistency in Shariah opinions, and constraints to human resource capacity continue to be a cause for concern and a focus of policy action.

On the positive side, for instance on the adoption and implementation of IFSB standards by member countries and organizations, Jaseem Ahmed said the Board is making some progress, albeit slow. Another important sign is the emergence of national roadmaps and strategies for the development of Islamic financial sectors, and for their prudential regulation and supervision.

The IFSB in March 2012 launched a new medium term strategy for the period 2012-2015, the Strategic Performance Plan (SPP) that will focus on: i) strengthening the stability and resilience of Islamic finance through the development of a range of new standards and guiding principles aligned with the changes in the global regulatory environment; ii) broadening the range of cross-sectoral prudential and supervision standards and guiding principles including capital markets and takaful thus supporting the development of new instruments; iii) educating its stakeholder community about its work and standards so as to support the adoption and implementation of these; and iv) the launching of a revised “10-year Framework and Strategies for the Development of the Islamic Financial Services Industry” which was first developed by the IFSB in collaboration with the Islamic Development Bank (IDB) and its research arm, the Islamic Research and Training Institute (IRTI).

“The pursuit of financial stability”, said Jaseem Ahmed, “does not however solely depend on regulatory development and prudential standards. It depends also on collaboration and cooperation mechanisms that help all stakeholders towards achieving the common goals of a sound and sustainable financial services industry.”

Indeed, the IFSB and IOSCO are cooperating on introducing “Disclosure Requirements for Islamic Capital Market Products”. The Secretary General of IOSCO, David Wright, has in the recent past called for greater harmonization in disclosure requirements across jurisdictions where Islamic capital markets products are offered.

Wright stressed that “the recent financial crises highlighted the importance of sound disclosure regimes in mitigating systemic risk and building confidence in the financial markets. Given the tremendous growth of the Islamic finance industry – an increasingly important segment of the global financial markets – it is essential to achieve greater harmonization in disclosure requirements across jurisdictions where Islamic capital market products are offered.”

In response, Jaseem Ahmed, emphasized that promoting cross-border financing and investment through Islamic finance is critical to attaining the depth and scale in Islamic capital markets needed to be competitive. “This will require the adoption of robust regulatory and disclosure practices that give confidence to investors and consumers alike. IFSB hopes that this collaboration with IOSCO will facilitate a process leading to a set of practices that could be harmonized or mutually agreed upon,” he added.

Perhaps the IFSB can be excused for choosing the optimistic theme, “The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth”, for its 10th Anniversary Annual Summit which Bank Negara Malaysia, the central bank, has offered to host on May 14-17, 2013 in Kuala Lumpur.

The challenge for 2013 is to match this optimism with a more urgent and bolder operational plan through the adoption of not only the usual suspects of outstanding standards and guidelines but also others which are outside that operational black box – all of which would make the IFSB a more effective and relevant organization serving the global Islamic financial industry.

Zulkifli Hasan
Brussel, Belgium


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