Standards and standardization are a vital tool and concept in the modern Islamic finance industry. They ensure transparency, consistency and predictability. They lend support to better governance and more importantly, they render financial stability in the market. NOOR SUHAIDA KASRI and IBRAHEEM MUSA TIJANI walk us through the tremendous efforts made toward achieving standardization in the industry.
Islamic financial institutions exist within the global financial system, hence the urge for it to adhere to global financial standards set by the Basel Committee on Banking Supervision, the International Financial Reporting Standards, the International Accounting Standards Board and the like. In addition, Islamic financial institutions must also consider standards issued by Islamic finance standard-setting bodies like AAOIFI, the IFSB and for a country like Malaysia, Bank Negara Malaysia (BNM)’s Shariah standards.
Review of 2015
Looking back at this year, the growth in the Islamic finance industry remains steady with the industry expected to reach US$3 trillion within the next decade according to S&P’s estimates. The growth is hailed as a positive hint of resilience and soundness of the Islamic finance industry. However, there are still great concerns regarding implementation and enforcement of Islamic finance standards within the industry. The IMF at the beginning of the year gave its endorsement for Islamic finance standards; however, it raised concerns regarding the lack of adequate rules. Christopher Towe, the deputy director of the IMF’s Monetary and Capital Markets Department, was quoted in an article by Reuters as saying that “our analysis suggests that these standards are not being applied consistently, and this could either stifle the development of Islamic finance or encourage its growth in a manner that creates systemic vulnerabilities”.
The reasons perhaps, based on a latest survey on factors affecting the implementation of the IFSB standards (2015 Survey), are due to the difficulties found in the structure and drafting of the IFSB standard; in the structure and institutional capacity of the regulatory and supervisory authorities as well as the general institutional climate of certain jurisdictions.
Shariah standards are also beset with difficulties and challenges. One of the major issues lies in the differences in Shariah views; each Islamic finance Shariah body issues its own resolutions, Fatwas, parameters or guidelines, which are often divergent or even contradictory. As mentioned earlier, differences in jurisdictions and regulatory frameworks also create hindrance and pose challenges to individual countries.
This year the IFSB has issued one new standard, Core Principles for Islamic Finance Regulation (IFSB-17), and one highly important guiding note (GN-6). The GN-6, guidance for Islamic banks on the quantitative measures for liquidity risk management, is important as it clarifies the tools that Islamic banks could use in meeting the liquidity coverage ratio requirement. It defines the types of high-quality liquid assets that Islamic banks can hold and the weights or run-off rates that should be assigned to Islamic deposits.
This year AAOIFI has issued six new Shariah standards, ie Shariah Standard No. 49: Promise and Promising; Shariah Standard No. 50: Musaqah; Shariah Standard No. 51: Option of Properness; Shariah Standard No. 52: Options of Reflection/Reconsideration; Shariah Standard No. 53: Urboun (Earnest Money); and Shariah Standard No. 54: Conditional Termination of Contracts. The AAOIFI Shariah standards are currently adopted mainly in Bahrain, Sudan and Pakistan, while other jurisdictions implement the standards partially by adjusting them to fit within their regulations. BNM has issued two new Shariah standards this year on Sarf and Rahn. BNM’s Shariah standards are produced through years of rigorous discussions held with the International Shariah Research Academy for Islamic Finance along with other institutions.
Preview of 2016
The growing interest of global standard setting-bodies, such as the IMF, World Bank, etc, in the Islamic finance industry will spur closer interactions between these bodies and the Islamic finance standard setting-bodies. This would perhaps lead to convergence in standards, which is necessary to keep up with competition and innovation.
The IFSB in developing its Strategic Performance Plan 2016-2018 would be expected to take into consideration the findings of the 2015 Survey particularly on the standard development and implementation support.
BNM is expected to continue releasing more draft exposures of Shariah standards in order to ensure that all Islamic contracts used in the local Islamic finance industry are covered, in line with BNM’s Financial Sector Blueprint 2011-2020. One of the objectives of the blueprint is to strengthen and support the efforts undertaken by international Islamic finance organizations like the IFSB and AAOIFI. The AAOIFI Shariah standards may still remain as the most influential Shariah standards for years to come.
Moving ahead, the need to deconstruct or ‘delocalize’ international standards and implement them within the context of the local regulatory framework is vital. Thus, divergence of standards does not necessarily produce negative results, rather it accommodates creativity and innovation. However, what is expected in the move toward greater standardization and harmonization is to minimize the various risks, whether financial, legal, Shariah non-compliance, etc, in a more efficient and effective manner.
Noor Suhaida Kasri is currently a researcher and the head of the International Shariah Research Academy for Islamic Finance (ISRA)’s Islamic Capital Market Unit. She can be contacted at [email protected].
Ibraheem Musa Tijani is the executive knowledge management under the Research Affairs Department at ISRA. He can be contacted at [email protected].