The COVID-19 pandemic was not expected, and its impact has been felt across all industries. It has quickly evolved from being a public health issue to being a source of serious economic challenge. According to the Asian Development Bank, the global economy could suffer between US$5.8 trillion and US$8.8 trillion in losses, equivalent to 6.4% to 9.7% of global GDP as a result of COVID-19. Likewise, the IMF estimates that global GDP will fall even further by an additional 3% in 2020 if the pandemic does not recede in the second half of the year.
Despite all these challenges posed by COVID-19, 2020 witnessed many developments in the Islamic financial industry, particularly in the area of Shariah governance. This report highlights the most important Shariah governance-related developments and initiatives of the Islamic financial industry in 2020 and what is expected in 2021.
Review of 2020
One prominent initiative was the Kingdom of Saudi Arabia’s Shariah Governance Framework for Islamic financial institutions. The framework, which came into effect in July 2020, was developed by the Saudi Arabian Monetary Authority as a result of the growing scale and complexity of Islamic finance business in the country, which has triggered the need to strengthen the Shariah compliance mechanism in its Islamic financial institutions.
In Kuwait, on the 1st September 2020, the board of directors of the Central Bank of Kuwait (CBK) laid down the principles and rules for the establishment of a Supreme Shariah Supervisory Board at the CBK. The idea of establishing a centralized Shariah board at the central bank has become vital to strengthen financial stability, minimize the risk of Shariah issues and enhance Shariah governance practices in Islamic financial institutions.
In Algeria, the country’s central bank released its long-awaited Islamic banking regulation (No 20-02), which was published on the 15th March 2020, to govern the implementation of Islamic finance in Algeria. The regulation clearly mentions the term ‘Islamic finance’ instead of ‘participatory finance’, which was used in the previous regulation, and it has elicited many comments and concerns from the public. The Act defines the banking operations and activities related to Islamic finance and the rules and conditions that apply to them.
Another initiative worth noting is the issuance of the Shariah Governance Standards for Islamic Financial Institutions by the Central Bank of the UAE which are mandatory, and all Islamic financial institutions must set a Shariah governance framework in accordance with the standard, size and complexity of their operations.
In addition, the standards comprehensively stress the duties and key responsibilities of the board of directors with regards to the implementation of the standards within Islamic financial institutions and discuss the role and responsibilities of senior management and the internal Shariah supervision committee and their main duties.
The Central Bank of the UAE also organized a meeting of members of central Shariah boards from across the globe. This was done as the continuation of the first meeting, which was organized by Bank Negara Malaysia in 2018. The objective of this meeting was for the members to exchange their experiences and resolutions so that they can be of benefit to all. This kind of interaction will surely facilitate the convergence of the Shariah minds in Islamic finance across the globe.
Preview of 2021
2021 will be a challenging year, especially if the pandemic does not recede by the end of 2020. With economies battling the COVID-19 crisis, it is expected that there will be more global Sukuk issuance in 2021 to support fiscal stimuli and maintain the growth rate. Such an initiative has already been unveiled by the IsDB which has raised US$1.5 billion with its first-ever sustainability Sukuk to tackle the aftermath of the COVID-19 pandemic in its member countries.
Such innovation in the Islamic capital market sector, particularly in sovereign Sukuk, is considered as an alternative tool for mobilizing financing that could help governments to face the economic challenges posed by COVID-19 pandemic.
In addition, it is expected that there will be more efforts by regulators to establish a centralized Shariah body. The objective of the centralized Shariah body would be to foster greater connectivity and collaboration among Shariah scholars and financial supervisory authorities to unlock the full value proposition of Islamic finance. Even if that does not materialize soon, interaction among members of centralized national Shariah boards are expected to increase in the future so as to streamline Shariah resolutions across different jurisdictions.
To conclude, 2020 has been very challenging due to the COVID-19 pandemic, which has had unprecedented impacts on government finances, private sectors and financial institutions, including Islamic financial institutions. Having said that, it is anticipated that these Shariah governance initiatives will boost the punctuality and quality of Shariah-based decisions for Islamic financial institutions.
In addition, regulators, supervisory authorities and central banks should issue new guidelines and enhance the current Shariah governance framework to mitigate the impact of COVID-19. In other words, there is a need to update banks’ existing policies and procedures and to strengthen internal governance and controls.
The overall monitoring mechanism must also be improved to contain the financial implications of the COVID-19 pandemic and to give some relief to individuals and SMEs facing financial hardship. This should include, among others, key parameters for debt moratoria, types of financing, tenors of financing, rescheduling or restructuring mechanisms and charges for deferment. It is also hoped that the Shariah fraternity will have more interaction so as to ensure more harmonious Shariah rulings across the globe.
Prof Dr Mohamad Akram Laldin is the executive director of the International Shari’ah Research Academy for Islamic Finance (ISRA). He can be contacted at [email protected]