Islamic finance body IFSB launches industry indicators

The Islamic Financial Services Board (IFSB) has launched a databank of industry indicators covering 15 member countries, helping shed new light on the size and shape of the sharia-compliant banking sector.

The Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, is supporting a range of initiatives to improve supervision of the sector as it achieves greater prominence in several Muslim-majority countries.

The 188-member IFSB added financial inclusion to the industry's agenda this month and released final guidance on liquidity management for Islamic banks.

The IFSB collected data directly from regulatory bodies and plans to update figures on a quarterly basis, while adding more countries and sectors, it said in a statement.

For the initial 15 countries, a total of 207 Islamic banking institutions were identified, which held a combined $1.18 trillion in assets and had 10,711 branches as of 2013.

Country-specific data also provides a rare insight into Islamic banking practices in Saudi Arabia and Afghanistan, where official figures are hard to come by.

At the end of 2013, Saudi Arabia had 4 full-fledged Islamic banks and 8 Islamic windows, units of conventional banks that offer sharia-compliant financial services.

Islamic lenders in the kingdom rely heavily on murabaha, a cost-plus mode of financing, which represents 62.4 percent of total financing for full-fledged Islamic banks and 86.7 percent for Islamic windows.

In contrast, Afghanistan had 6 Islamic windows and no full-fledged Islamic banks, relying on a profit-sharing contract known as musharaka for 53.3 percent of total financing.

The data also covers Bahrain, Bangladesh, Brunei, Egypt, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Oman, Pakistan, Sudan, and Turkey.

The IFSB indicators are being developed with technical assistance from the Asian Development Bank and the Islamic Development Bank. 

(Reuters / 27 April 2015)

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IFSB guidance for Islamic banks may spur sukuk issues, deposit insurance

The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released final guidance on liquidity risk management for Islamic banks, which may spur national authorities to issue more sukuk and establish sharia-compliant deposit insurance schemes.

The guidance note, known as GN-6, clarifies the tools that Islamic banks can use to meet Basel III regulatory requirements, now being phased in for both conventional and sharia-compliant banks around the world.

It defines the types of high-quality liquid assets (HQLA) that Islamic banks can hold and the weights that should be assigned to Islamic deposits, which can be more volatile than conventional ones for various reasons, including the fact that they have relatively short maturities.

HQLA must have low correlation with risky assets, an active secondary market and low volatility. The highest level of HQLA includes sukuk (Islamic bonds) issued by sovereigns, multilateral development banks and the Malaysia-based Islamic Liquidity Management Corp.

Such HQLA should be accepted by central banks as collateral in their liquidity facilities, the guidance note says. The note could therefore encourage issuance of HQLA and local currency sukuk by sovereigns and their central banks, credit rating agency Standard & Poor's said in a research note.

"Based on the size of the Islamic finance industry, its composition, and its growth trajectory, we estimate the need for HQLA to reach about $100 billion in the next few years," S&P added.

The guidance note also details three arrangements that regulators can use to meet Basel III requirements in more undeveloped banking markets: central bank liquidity facilities, foreign currency HQLA that could be used to cover domestic currency liquidity needs, and expanded use of lower-level HQLA.

DEPOSIT INSURANCE

In the long term, the guidance note will also encourage regulators to develop Islamic deposit insurance schemes to reduce the need for HQLA, S&P said.

The note says such schemes could significantly lower the run-off rates, or weights, that are assigned to deposits. The riskier the funding source, the larger the amount of HQLAs needed to cover deposits.

For deposits classified as "stable", the IFSB guidance applies a 5 percent run-off factor, but this can be cut to 3 percent if a deposit insurance scheme is in place that is based on a prefunding system and is available quickly.

For less stable deposits, a minimum run-off rate of 10 percent is to be applied, the guidance note says.

The IFSB note classifies foreign currency-denominated retail accounts, which are large at some Islamic lenders, in the less stable category.

(Reuters / 20 April 2015)

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IFSB eyes stronger implementation of Islamic finance standards

The Islamic Financial Services Board (IFSB) will release an updated 10-year industry roadmap next week as it places greater emphasis on the implementation of its standards with regulators around the globe.

Guidelines from Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in some Muslim-majority countries and makes inroads in western markets.

The IFSB will release a Mid-Term Review (MTR) of the industry’s 10-year framework document on May 19, outlining benchmarks to monitor industry progress in a more focused way, IFSB secretary-general Jaseem Ahmed told Reuters.

The original framework, released in 2007 by the IFSB and the research arm of the Jeddah-based Islamic Development Bank , identified 16 recommendations for policymakers but did not spell out detailed metrics to track their progress.

“The MTR proposes a stronger implementation plan. This plan includes concrete initiatives – to be undertaken by a range of stakeholders – to bring the recommendations to life.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide, a decision driven in part by their diverse legal and regulatory backgrounds.

Now, however, the 184-member IFSB hopes to draw up more concrete steps for regulators while still leaving some flexibility given the wide range of industry development.

“A roadmap can be very helpful to national authorities, and the national industry, but in practice quite a few years of experience is needed before it becomes practical to develop an effective roadmap.”

INTEGRATION

Over the last decade, the IFSB has issued 22 standards and guidelines and now plans to develop new standards for Islamic reinsurance (retakaful) and capital markets, said Ahmed ahead of the IFSB’s annual summit to be held in Mauritius next week.

“The greatest need is to bring takaful and capital markets to a state of comparability, from the regulatory perspective, with the banking sector. So these are two areas where we are gearing up for additional issues.”

A working group to study a standard for retakaful has now been launched and another working group will soon be set up to study a standard for capital markets, Ahmed said.

“This is an important initiative to facilitate the integration of Islamic finance into the global economy by bringing it within the global surveillance mechanism of the International Monetary Fund and the World Bank.”

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy, with further guidance in the pipeline.

The IFSB has now begun work on a technical note on stress testing and it has also conducted a study on liquidity issues to help shape a guidance note.

The latter would take up the challenges posed to Islamic banks by the liquidity coverage ratio and net stable funding ratio introduced by the Basel III framework, said Ahmed.

MARKETS

Islamic finance has its core markets in the Middle East and Southeast Asia, but its expansion into new jurisdictions has meant the IFSB is increasingly in touch with regulators in Africa, Asia and Europe.

“Implementation is picking up as the market grows. We see a clear pick up in implementation once the market becomes larger than 5 percent of the total of the respective financial sector.”

Countries like Senegal, Gambia, Nigeria and South Africa have taken steps to develop the industry, while detailed regulatory frameworks have emerged in others, said Ahmed.

“Oman and Kazakhstan are two examples of new markets in which policy-makers have benefited from the experiences of earlier jurisdictions.”

Over the past year, the IFSB has engaged with regulators in Nigeria, Sudan, Hong Kong, Bangladesh, Afghanistan and Libya; It held regional sessions at the Asian Development Bank and in Oman for the Gulf region. Its last European forum was hosted by Italy’s central bank.

“We are now preparing capacity and awareness building to be undertaken in Central Asia and in West Africa,” Ahmed said.

In March, South Korea’s central bank became a member of the IFSB, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.

(Business Day / 13 May 2014)

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IFSB revising guidelines for Islamic finance institutions around the world

SYDNEY: Kuala Lumpur-based Islamic Financial Services Board (IFSB) is revising guidelines on the supervision of Islamic finance institutions around the world, helping tighten regulatory oversight of industry practices.

Guidelines from the IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in several majority Muslim countries.

The latest update complemented stricter Basel rules, agreed globally to make banks safer after the 2007–09 credit crisis, IFSB secretary-general Jaseem Ahmed toldReuters.

This expands its original 2007 document, known as IFSB5, to include areas such as regulatory capital, corporate governance, stress testing, securitisation exposures, liquidity, concentration and counter-party risk.

“Overall, the revisions are significant, in particular the areas which were not envisaged in the IFSB5,” Ahmed said. “It is broadly analogous to Pillar 2 of the Basel accords.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide.

Now, however, the 187-member IFSB is issuing more detailed guidance in response to the global financial crisis, and a trend towards tightening regulation of conventional financial markets.

In the past year, the IFSB has issued separate guidelines on liquidity risk management and stress testing, while currently reviewing a draft on capital adequacy.

The revision provides more detailed guidance on areas such as Islamic windows, a practice which allows conventional banks to offer Islamic financial services provided that clients’ money is segregated from the rest of the bank.

Islamic windows are widely used in the industry but some regulators have struggled to cope with monitoring their risks and the complexity of financial reporting.

The IFSB plans a public hearing on the revised standard on Monday in Qatar, following a similar hearing in Kuala Lumpur last month.

(The Star Online / 07 Dec 2013)

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Islamic Financial Services Board needs to apply bolder approach

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.

(Saudi Gazette / 23 Dec 2012)

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IFSB to revise capital adequacy standard for Islamic banks

The IFSB sets global guidelines for Islamic finance, although national financial regulators have the final say on how much capital banks must maintain and in what form.

The Islamic body released its original guidelines on capital adequacy in December 2005, based on Basel II standards which regulators were then applying around the world. Since then, global regulators have agreed on stricter Basel III standards which will be phased in over the next several years.

IFSB spokeswoman Rose Halim told Reuters that her institution's new guidelines would address the issue of which Islamic instruments could be classified as bank capital.

"The IFSB is revising its capital adequacy standard, and in this context we are elaborating the issue of component of capital," she said in an email.

"For issuing sukuk as part of bank capital we have proposed different types of sukuk," Halim said, adding that sharia advisors where still discussing details.

SUKUK

Because sukuk or Islamic bonds are based on real assets rather than pure debt, as conventional bonds are, some analysts and bankers believe sukuk could play a major role in helping banks around the world meet Basel III's minimum capital ratios.

It will be up to national regulators, taking into account the advice of the IFSB, to determine which sukuk structures can be classified as capital and to what extent.

Some banks in the Gulf are already issuing sukuk in the expectation that the instruments will count as capital. Abu Dhabi Islamic Bank plans to boost its capital through the sale of a sharia-compliant debt instrument, and will start investor meetings on Wednesday, a statement from the arranging banks said on Tuesday.

The sukuk sale is likely to be benchmark-sized, a source at one of the arrangers said; benchmark bonds are typically $500 million or more in size.

Last year Saudi Arabia-based Bank Al Jazira strengthened its capital base by issuing a 10-year, 1 billion riyal ($265 million) sukuk, which it said would be classified as Tier 2 capital.

A draft of the IFSB's new guidelines will be issued in the first week of November for public consultation, said Zahid ur Rehman Khokher, a member of the IFSB's technical and research secretariat, the team that worked on the project.

(Reuters / 31 Oct 2012)

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ADB, Islamic Financial Services Board Sign Agreement to Promote Islamic Finance

Asian Development Bank (ADB) and Islamic Financial Services Board (IFSB) have signed a Memorandum of Understanding (MOU) on Wednesday. 

The MOU will facilitate in promoting the development of Islamic finance in common developing member countries.

“The importance of Islamic Finance in the development of Asia cannot be doubted, as can be seen by the significant increase in Shari'ah compliant financing in a number of ADB's developing member countries in recent years,” said Bindu Lohani, ADB Vice President for Knowledge Management and Sustainable Development. “We look forward to working even more closely with IFSB under this MOU to address some of the key issues facing our member countries in the areas of financial inclusiveness and infrastructure financing.”

Mr. Lohani and IFSB Secretary-General Jaseem Ahmed signed the MOU on behalf of their institutions.

The MOU provides an effective basis for joint activities and general cooperation in areas of common interest, with  the following objectives specified: Enhancing cooperation in the form of joint technical assistance and/or policy-based work in Common Developing Member Countries;

Promoting the development of Islamic finance, in particular strengthening the capacity of regulating and supervising Islamic financial services institutions, Islamic capital markets and Islamic liquidity management in Common Developing Member Countries; and
Stimulating joint research and exchange of information, which will be used as critical evidence to support policy areas of mutual interest, as well as to enhance knowledge-sharing between both organisations.

Mr. Ahmed thanked ADB for its longstanding support for Islamic finance, and noted that the MOU formalizes a partnership between IFSB and ADB going back to the provision of the first Technical Assistance by the ADB for Islamic finance in 2005. He underlined that the MOU was designed to serve both institutions and their respective mandates.

“In the context of Asia’s developmental needs, and the expanding potential for Islamic finance in the region, the MOU strengthens our ability to jointly support the policy, institutional and capacity requirements for a more resilient Islamic financial sector. I especially look forward to working with ADB in encouraging cross-border cooperation in the use of Islamic finance to address the challenges of widening financial and social inclusion in Asia, and in meeting Asia’s enormous need for innovative financial mechanisms for its infrastructure spending,” he said.

The IFSB is an international standard-setting organization that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organizes roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organizations, research/educational institutions and market players.
The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organizations and market players, professional firms and industry associations.

(International News Network / 03 Oct 2012)

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