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Monday, 13 May 2013

IFSB plays key role in market education of Islamic finance

LONDON — The Islamic Financial Services Board (IFSB), the multilateral organization established on Nov. 3, 2002 in Kuala Lumpur, with the mandate of promoting the soundness and stability of the Islamic financial services industry through the introduction of standards and guidance notes on capital adequacy, risk management and insolvency provisions for the banking, capital market and insurance sectors, celebrates its 10th anniversary next week which also coincides with its 10th annual summit. 

The Board actually started operations on March 10, 2003 under its inaugural Secretary-General Professor Rifaat Abdel Karim, and within a space of a decade it has probably done more than any other single institution to put Islamic finance firmly on the map of the multilateral institutions policing the global financial system. 

The theme for the summit, which will be held on May 16-17 in Kuala Lumpur, and hosted by Bank Negara Malaysia, the central bank, reflects the mood in general in global banking today but which is equally relevant to the Islamic finance industry: “The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth.” In many ways it also reflects the agenda for the Board over the next few years. 

Whether the IFSB would have achieved what it has in its first ten years without Rifaat being at the helm, must be doubtful. He almost single-handedly pushed the IFSB agenda through his energetic approach, and his ability to negotiate with his immediate bosses, the IFSB Governing Council. But above all, Rifaat put Islamic finance firmly on the map and in the minds of the multilateral financial institutions that mattered in global finance – the World Bank, the International Monetary Fund (IMF), the International Finance Corporation, the Basel Committee for Banking Supervision, the Bank for International Settlements (BIS), the Asian Development Bank and the International Accounting Standards.

He also managed to attract the World Bank, IMF, BIS and even the People’s Bank of China to become Associate Members of the Board. Similarly, he got the Banque centrale du Luxembourg, to sign up as Europe’s first and only regulatory authority to join the IFSB. 

Given the continuing global economic crisis symbolized by deficit reduction and austerity programs in the industrialized economies and the ongoing Eurozone debt crisis as in the Cyprus bailout, coupled with a range of new regulatory and compliance initiatives led by the Basel III Process including its new Liquidity Coverage Ratio (LCR) Standard, it is inevitable that the global financial services debate should concentrate on the resilience of financial institutions in pre-empting and managing future crisis and stress, contributing to market and systemic stability and helping to forge GDP growth which encompasses all stakeholders in society.

The contagion effect and economic impact has been pervasive — and no economy has been spared. The global Islamic finance industry, because of the nature of its faith-based ethos which proscribes interest-based financing, speculation in derivatives, and requires transactions to be backed by underlying real assets thus contributing to productive activities in the real economy, has coped with the crisis better than its conventional counterparts.

But they are faced with many of the same challenges which the global financial services industry is faced with whether in meeting tougher capital adequacy and liquidity requirements; risk management and stress testing measures; compliance measures especially in combatting money laundering and tax evasion; and rediscovering the inclusiveness of banking and financial services to serve society and the economy and not just the corporates and the rich. 

These and the core issues are firmly reflected in the key topics to be discussed at the IFSB Summit sessions. These include: 

• Global financial regulatory reforms 
• Challenges relating to a cross-cultural approach to the regulation of Islamic finance and market development 
• The prospects in new markets 
• Forging the new frontiers of Islamic finance
• Innovating for inclusive economic and market growth 

Dr. Ahmad Mohamed, President of the Jeddah-based Islamic Development Bank (IDB) Group, will give the keynote address at the opening session of the Summit on May 16. There will also be other prominent central bankers and international officials speaking at the Summit including Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia; Sheikh Abdullah Saud Al-Thani, the current Chairman of the IFSB Governing Council and Governor of the Central Bank of Qatar; Dr. Abdulrahman Alkalaf, Deputy Governor of SAMA; Karl Cordewener, Deputy Secretary-General of the Basel Committee on Banking Supervision at the Bank for International Settlements (BIS); and Abayomi A Alawode, Manager of the Financial Systems Global Practice at the World Bank. 

So what of the achievements of the IFSB over the last decade? 

A key achievement is its reach. The IFSB at 7 April 2013 had an impressive 187 members comprising 57 regulatory and supervisory authorities, eight international inter-governmental organizations and 122 market players, professional firms and industry associations operating in 43 jurisdictions. 

Some credit here must also go to Rifaat’s successor, Secretary General Jaseem Ahmed, who continues to promote the organization with the same urgency and vigor as before.

The IFSB has also excelled in issuing a series of Standards or Guiding Principles (13 to be precise), five Guidance Notes and one Technical Note. Through these, the Board has highlighted potentially serious and in some cases entrenched issues pertaining to regulating the Islamic financial services industry, and offered ways of managing, mitigating or pre-empting them and taking into account the very specificities of Islamic financial intermediation. 

The Guiding Principles issued include ones on Risk Management, Corporate Governance, Capital Adequacy, Islamic Collective Investment Schemes, Capital Adequacy for Sukuk Securitizations, Governance of Takaful, Shariah Governance, Solvency Requirements for Takaful, and Liquidity Risk Management. The fact that more jurisdictions are starting to adopt and implement the IFSB Guidance Principles is an encouraging sign, and attests to the demonstration effect of the IFSB and its standards. 

The IFSB has also played and continues to play an important role in market education regarding Islamic finance.  

The founders of the IFSB, which include the central banks of Saudi Arabia (SAMA) and Malaysia, in a unique display of unity rose to the occasion in the early 2000s when both Asia and Turkey were experiencing the impact of their own financial crises, to set the course for the orderly development of the Islamic financial services industry underpinned by the development of a sound set of prudential and supervisory standards to cope with the new risk, regulatory and market challenges that were emerging in an ever-changing international financial landscape. 

Indeed, apart from the technical, resource and operational challenges, a major ask for the IFSB founders and members will be a redoubled unity to take the Islamic financial system to the next level of its development over the next decade.

(Saudi Gazette / 13 May 2013)

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