As the Islamic Financial Services Board (IFSB) enters its 10th year this November, we take a look at the role of standard-setting bodies across the board and their impact in shaping the landscape of the Islamic financial services sector.
The issue of industry standardization, or a lack thereof, seems like an insolvable one – for now, at least. Standard-setting bodies such as AAOIFI, the International Islamic Financial Market (IIFM) and the IFSB have been relatively successful in achieving some semblance of standardization in pockets across the globe, but are still far from gaining the coveted title of Global Standard-Setting Body.
From a distance, it seems somewhat counterintuitive that the industry, which craves a streamlining of rules and regulations, has been rather blasé about the role of these standard-setting bodies, and the adoption of their standards. And although, in essence, these bodies have different core focuses — with AAOIFI specializing in accounting and auditing standards, IIFM looking at financial products and instruments, and the IFSB focusing on operations and corporate governance of Islamic financial institutions, none of them have become globally influential in their areas of expertise.
A lack of focus in most cases almost always derails one from one’s goal, and this has become evident in the realm of standard-setting. It has been said that these standard-setting bodies currently suffer from some sort of identity crisis, or perhaps the desire to become a jack of all trades, instead of a master of one. AAOIFI, for instance, is meant to look into accounting and auditing standards, but over the years its role has overlapped with the IFSB in terms of governance. Up until now the IFSB, whose standards have been enforced in Malaysia and fully endorsed by the central bank, Bank Negara Malaysia, has only been successful in gaining a foothold in home ground.
Speaking to Islamic Finance
news, Megat Hizaini Hassan, an Islamic finance partner at Allen & Gledhill, said that due to the nature of the standards being voluntary in terms of their adoption, there has not been much filtering through of the IFSB standards in particular, outside of Malaysia. “In Malaysia, there is extensive adoption of these standards for the main reason: Malaysia is the host. The IFSB is based in Bank Negara Malaysia itself, therefore there is a lot at stake for Malaysia in terms of the adoption of these standards. There is vested interest for the Malaysian government that the standards work and are implemented in the country.”
He added: “Globally there does not seem to be such rigorous adoption of these (IFSB) standards. No particular jurisdiction appears to have embraced the standards to the same extent as Malaysia; not even the other jurisdictions where the central banks are members of the IFSB.”
At present, the IFSB has 27 full members comprising regulatory bodies, central banks and financial services authorities spanning most of the jurisdictions which are active in Islamic finance. These include: Bank Indonesia, the Central Bank of Bahrain, Autoriti Monetari Brunei Darussalam, Dubai Financial Services Authority, Monetary Authority of Singapore, Qatar Central Bank, Saudi Arabia Monetary Authority, State Bank of Pakistan, Securities and Exchange Organization of Iran, and the Islamic Development Bank, amongst others.
“Conceptually, the IFSB have got it right. They have done admirable work in this regard, but ultimately they would need to continue and work with Basel in developing, applying and modifying their standards to ensure Shariah compliance, and compliance with Basel,” Megat said. However, he added that at the moment, it is not possible for the IFSB standards to achieve the same momentum and command the same authority as Basel due to its less developed status. “The IFSB is an emerging entity. It is slowly being recognized as a standard-setting body, but at the moment, it may not command the same authority as Basel. There are also other legal and regulatory considerations to be made. The IFSB has only been around for 10 years compared to Basel. Now it is more a question of everyone seeing the benefit and value of the IFSB, and ensuring that the standards are implemented.
“In Malaysia, the standards that IFSB has issued for Islamic banking and finance relate more to the operations of Islamic financial institutions, rather than being focused specifically on Islamic finance contracts themselves. Some of these standards have been applied by central banks, and the Shariah Governance Framework issued by Bank Negara Malaysia last year was also based largely on the IFSB guidelines. At the end of the day, there is only so much the IFSB can do, and it is up to the member countries to implement its guidelines. Apart from Malaysia, the standards do not seem to have filtered through into the Islamic banking and finance sectors in other jurisdictions,” he added.
Based on Malaysia’s experience, it is becoming more evident that there has to be enough political will, and sufficient intervention from regulators, to create the global adoption of a set of standards. Unfortunately, this would also involve the removal of free will, which at the end of the day, is what makes for a vibrant and dynamic market with room for innovation. — NH