Nigeria Urged To Tap Islamic Financial Resources

The Lord Mayor of the City of London, Alderman Alan Yarrow has urged the country to consider all sources of finance as a means for attracting investment.

In particular the Mayor during a trip to Nigeria was keen to highlight the City of London as a leading centre for Islamic finance and stated Islamic finance can provide substantial investment for Nigeria. He added Islamic financing was currently marginally more expensive when compared to conventional finance but this difference was expected to reduce as volumes increase within the Islamic financial market. The Lord Mayor suggested the North of Nigeria would in particular benefit from Islamic financial products.

Yarrow who met with financial sector regulators and operators including the Securities and Exchange Commission, CBN, Jaiz Bank Lotus Capital among other, in Abuja last week, said London with six Islamic banks and another 20 lenders currently offering Islamic financial products and services had the capacity to help Nigeria to deepen its Islamic financial system.

He said, “We want our Nigerian friends and partners to see London as Nigeria’s international companion whatever type of expertise is required. From looking at Nigeria’s legal framework, to helping to up skill your young, dynamic and ambitious population, London has the expertise, the variety and the capacity to help. And most of all, we offer the willingness.

“Only a few months ago, UK’s Chancellor of the Exchequer – which is really the name of our Finance Minister – stood beside me and the Governor of the Bank of England and he spoke about the importance of Islamic finance.

(Leadership / 12 October 2015)

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Pakistan AFRIDI FOR ISLAMIC FINANCIAL LAWS IN BUSINESSES

Lahore—Pak-China Joint Chamber of Commerce and Industry (PCJCCI) Saturday called for making the businesses and commercial activities in accordance with Islamic financial laws. 

The PCJCCI President Shah Faisal Afridi told APP here that Islamic banking has proved over time that it is based on firm and sound economic principles and has a good potential to become an alternative system of banking especially in view of the global financial crises. However, efforts should be made to modify the existing structure to provide better products andquality service within the ambit of Islamic laws, he said. He said all stakeholders should understand the limitations at this stage and work towards its advancement to develop an economic system truly reflective of the sacred principles of Islam. 

According to Global Islamic Finance Report, Pakistan ranked at number nine in the world in terms of development of Islamic financial services industry in the country, and second largest Islamic market (population-wise) after Indonesia, and could become the most important player in Islamic banking and finance, if it attained 20 percent market share. Faisal Afridi said, “Time has come where we should look ahead and concentrate to develop innovative products with more perfection and purity.” 

He mentioned that growth of Islamic banking in the country has been over 30 percent in last few years, which is certainly above the average global growth rate of Islamic banking and finance. “If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs 926 billion.” 

“If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20 and 30 percent of the market share,” he added. He said, at present there are more than 600 Islamic banking branches throughout Pakistan and 19 Islamic banking institutions are offering commercial banking services as he appreciated the new Islamic banking strategy by the State Bank of Pakistan to double the number of Islamic banking branches in next four years. 

“To achieve the desired goal, we need highly competent, motivated and involved persons with required knowledge of conventional banking and finance as well as knowledge of Islamic Shariah,” he asserted. Faisal Afridi mentioned to product innovation, development and research, flexible and practical application and enforcement of shariah principles, creation of global financial hubs and regulators as key drivers for growth and competitiveness of Islamic finance industry.

(Pakistan Abserver / 28 September 2015)

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Islamic financial products risk losing their uniqueness

Islamic finance continues to expand globally but the industry risks losing its differentation from conventional financial products and lacks official data to ensure better supervision, an oversight body said.

Islamic finance weathered the global financial crisis better than conventional banking and is recovering in areas such as profitability and asset quality, the Islamic Financial Services Board (IFSB) said in its third financial stability report.

Islamic finance, which has its core markets in the Middle East and Southeast Asia, follows religious principles that ban interest and shun outright speculation, and as such is seen as an alternative to interest-based banking.

But the industry’s fastest-growing Islamic bonds segment (sukuk) is moving away from profit-sharing structures, which risk weakening the industry’s value proposition.

Less than 7 percent of all new sukuk issued in the first three quarters of 2014 were based on risk-sharing contracts and instead favoured sales-based contracts, the report found.

This could lead sukuk to be valued using similar pricing and risk management approaches used for bonds.

“As a result, any adversity in the global financial system, even if it originates in the conventional sector, has an impact on the financial stability of the sukuk market.”

This was observed in the volatility stemming from the U.S. Federal Reserve’s monetary policy meetings, which had identical effects on both the sukuk and bond markets, the report said.

DATA

Another concern is the lack of official data to help monitor and supervise the industry. Some public and private sector entities collect such information but in most cases it is not standardised or comprehensive, the IFSB said.

Last month, the IFSB launched a databank of industry indicators covering 15 countries aiming to help fill this gap.

Islamic finance now holds systemic importance in countries such as Kuwait and Qatar, and has made wider gains buoyed by support from governments such as Pakistan and Turkey.

But with growth come more regulatory requirements, such as consumer protection tools in the form of sharia-compliant lender of last resort facilities, which remain rare.

The IFSB found that out of 24 countries surveyed, only Bahrain, Malaysia, Nigeria and Sudan have implemented such facilities. Fifteen respondents said they would consider lender of last resort provisions, but timeframes ranged from one to five years.

Jordan expects to have a lender of last resort facility fully operational within one to two years, the report said.

(Reuters / 27 May 2015)

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he market for Islamic financial products is growing fast

AFTER morning coffee but before the keynote speaker came the muezzin’s recitation from the Koran: “Those who consume interest cannot stand except as one stands who is being beaten by Satan into insanity.” But those attending the Global Islamic Financial Forum needed no reminders that Muslims are supposed to eschew interest: the industry based on that premise is booming. Ernst & Young, a consultancy and accounting firm, estimates that Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018. Khalid Howladar of Moody’s, a rating agency, calls this “a landmark year” for Islamic finance, in that it is moving from “a very esoteric asset class to one that’s more… global.”

Most of the world’s Muslims are not so devout that they completely abjure conventional finance: even in Saudi Arabia, the assets of Islamic banks account for barely half of all banking assets. Muslim account-holders, Mr Howladar explains, tend to be more concerned with the products and service on offer than with the strictures of sharia (rules based on Muslim scripture). But Islamic finance, he says, has become sophisticated enough to appeal on both counts. Humphrey Percy, who heads the eight-year-old Bank of London and the Middle East, believes that most of his customers came not out of fierce piety, but “purely as a value proposition”.

Though the principles underlying Islamic finance are as old as the religion itself, modern banks did not start offeringsharia-compliant products until the mid-1970s. Since then it has grown into a global industry, with total assets of around $2 trillion. Most of that (nearly 80%, according to Malaysia’s central bank) is entrusted either to Islamic banks or to the Islamic units of conventional banks. The rest takes the form of sukuk, Islam’s answer to bonds (15%); Islamic investment funds (4%) and takaful, the Islamic version of insurance (1%). In 2012 Iran accounted for 43% of the world’s Islamic banking assets, with Saudi Arabia (12%) and Malaysia (10%) ranking second and third.

The demand created by this rapidly growing pool of Islamic capital has spurred the growth of sharia-compliant products. These take many forms, but none may pay or charge interest, nor can they invest in things that Islam forbids (so no alcohol, pork, gambling or pornography). In an Islamic mortgage, for instance, a bank does not lend money to an individual who buys a property; instead, it buys the property itself. The customer can then either buy it back from the bank at a higher price paid in instalments (murabahah) or make monthly payments to the bank comprising both a repayment of the purchase price and rent until he owns the property outright (ijara).

By the same token, a holder of sukuk has not technically lent the issuer money; instead, he owns a nominal share of whatever the money was spent on and derives income not from interest but either from the profit generated by that asset or from rental payments made by the issuer. At the end of the sukuk’s term the issuer returns the principal to the investor by buying his share of the asset. Cynics may point out that the difference between these structures and a conventional bond or mortgage is, in practice, rather slight: both provide predictable income to those who make their capital available.

But that does not seem to have dampened their appeal. Bahrain’s central bank issued the first sovereign sukuk in 2001; from 2002 to 2012, annual issuance grew at an average rate of 35%, from $4 billion to $83 billion (see chart), dwarfing even the healthy growth of Islamic banking assets. Most sukuk are denominated in the currency of the issuer and intended for local investors, but international issuance is growing, from 10% of the sovereign sukuk issued in 2010 to 20% in 2014. Of the $296 billion of sukuk outstanding as of July, Moody’s estimates that sovereigns account for 36%, with Malaysia the leading issuer. In June Britain became the first western country to issue sovereign sukuk; its £200m ($322m) sale attracted orders of £2.3 billion.

Western firms are also beginning to usesukuk to raise money. Société Générale and Bank of Tokyo-Mitsubishi UFJ, a French and a Japanese bank respectively, have issues in the works; Goldman Sachs is reportedly considering a $500m offer.

Despite strong recent growth for Islamic financial products, there still is room for further expansion, both in relatively unbanked Muslim countries in the developing world and in the West. As the orders for Britain’s issue showed, demand for sovereign sukuk is strong. Hong Kong and South Africa are scheduled to issue dollar-denominated sukuk later this month. Luxembourg, Russia, Australia, the Philippines and South Korea have also shown interest.

There are potential pitfalls. Goldman’s previous attempt to enter the market foundered amid claims its proposed sukuk did not comply with sharia. Indonesia has scaled back its issuance of one type of sukuk due to similar complaints. Malaysian scholars approved an Islamic credit card based on a transaction known as baya al-ina, which Arab scholars have rejected as being too close to interest-based lending.

Such rows have led to calls for greater international standardisation—hence the creation by national regulators of such entities as the Islamic Financial Services Board, which issues both religious and prudential guidance, playing the same role as the Basel Committee does for conventional banks. Zeti Akhtar Aziz, governor of Malaysia’s central bank, believes it will foster “harmonisation in how institutions are regulated”. But since Islam has no overarching authority that can approve its rulings, there will always be disputes.

(The Economist / 13 September 2014)

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Islamic financial system shows inherent resistance to global crises

KARACHI: Islamic finance is one of the fastest growing segments of the global financial industry. In 2008 the size of the global Islamic banking industry was estimated about $820 billion. Now it is closer to $1.35 trillion according to Global Islamic Finance Report (GIFR), and is expected to cross $1.6 trillion before the end of the current fiscal year. 

The Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks having Islamic banking windows operating in more than 75 countries, according to the GIFR.

Pakistan is also a fast growing country with regards to Islamic finance and growth has been phenomenal. Starting from scratch in 2002, it is now about 8% of the local banking industry.

While Islamic banks play roles similar to conventional banks, fundamental differences exist. The central concept in Islamic banking and finan

ce is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses, and charging interest is prohibited.

There are also differences in terms of financial intermediation, the paper notes. While conventional intermediation is largely debt based, and allows for risk transfer, Islamic intermediation, by contrast, is asset based, and based on risk sharing. One key difference between conventional banks and Islamic banks is that the latter’s model does not allow investing in or financing the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. These include toxic assets, derivatives, and conventional financial institution securities.

Analysis done by the IMF suggests that Islamic banks fared differently, if not actually better than conventional banks during the global financial crisis. Factors related to the Islamic banking business model helped contain the adverse impact on their profitability. In particular, smaller investment portfolios, lower leverage, and adherence to Shariah principles—which precluded Islamic banks from financing or investing in the kind of instruments that have adversely affected their conventional competitors — helped contain the impact of the crisis when it hit in 2008.

The study used bank-level data covering 2007−10 for about 120 Islamic banks and conventional banks in eight countries — Bahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates. These countries host most of the world’s Islamic banks (more than 80% of the industry, excluding Iran) but also have large conventional banking sectors. The key variables used to assess the impact were the changes in profitability, bank lending, bank assets, and external bank ratings.

While the study showed that Islamic banks were able to better withstand the initial impact of the crisis, the following year (2009), weaknesses in risk management practices in some Islamic banks led to a larger decline in profitability compared to that seen in conventional banks. The weak 2009 performance in some countries was associated with sectoral and name concentration—that is, too great a degree of exposure to any one sector or borrower. In some cases, the problem was made worse by exemptions from concentration limits, highlighting the importance of having a neutral regulatory framework for both types of banks.

Despite the higher profitability of Islamic banks during the pre-global crisis period (2005–07), their average profitability for 2008–09 was similar to that of conventional banks, indicating better cumulative profitability and suggesting that higher pre-crisis profitability was not driven by a strategy of greater risk taking. The analysis also showed that large Islamic banks fared better than small ones, perhaps as a result of better diversification, economies of scale, and stronger reputation.

Islamic banks contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of conventional banks. The IMF paper attributes this growth to their higher solvency and to the fact that many Islamic banks lent a larger part of their portfolio to the consumer sector, which was less affected by the crisis than other sectors in the countries studied.

However the post-crisis years have also shown where the Islamic banking sector is relatively weak. It lacks as efficient a structure for liquidity management as seen in conventional banking. The IMF report also recommended that the sector needs a stronger supervisory and legal infrastructure, including bank resolution.

The paper also recommended that Islamic banks and supervisors work together to develop the needed human capital, saying expertise in Islamic finance has not kept pace with the industry’s growth.

(The Express Tribune / 17 Dec 2012)

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Call for harmonised Islamic financial reporting

KUALA LUMPUR: A new report by the Association of Chartered Certified Accountants (ACCA) and KPMG has called for standard setters and Islamic banks to work together to harmonise financial reporting.

ACCA said the rapid global growth in Islamic finance meant that it must be reported in a way that was harmonised and more consistent.

“The report calls on the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance, standards and educate the investor community on key issues,” it said in a statement.

“IASB should consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products which are offered by Islamic financial institutions and conventional banks.”

ACCA said they should also consider issuing guidance on additional disclosures that could be made for stakeholders who were seeking information on the entity's syariah-compliant operations.

“The industry needs to engage more with local regulators to understand their expectations of financial reporting and the disclosure of Islamic financial instruments,” it said.

ACCA head of international development Aziz Tayyebi said the key challenge faced by Islamic finance and global standards setters was how to resolve the fact that Islamic finance institutes (IFIs) in different countries reported transactions in different ways.

“If they are to remain competitive with conventional counterparts, their financial reports need to be comparable. This will involve a great deal of work and education, but should be beneficial for IFIs and those who rely on their reports,” he added.

(The Star Online / 05 Dec 2012)

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Islamic financial system can boost economy

Karachi—The fast-growing Islamic finance industry (IFI) holds the potential to contain unemployment and boost economy if an efficient and effective monitoring mechanism is in place.

Dr Ali Hasan Hamdani, an economist associated with a local private sector university in a statement received here on Tuesday said IFI industry needed creativity and guidance to ensure Shariah compatibility and integrity of the products offered in the country.

He said around five per cent share held by IFI in Pakistan indicated that masses need to know difference between Islamic and conventional products.

The economist recommended that all the details of the Islamic products, internal compliance, methodology and conflict of opinions should be openly discussed and masses be sensitized about it.

He also suggested need for a good risk management system that is important to protect the interests of investors and institutions.

“The industry must be open to criticism and listen to the clients to win approval,” he said.

Dr. Hamdani said there was an equally urgent need to educate masses as well as investors to boost Islamic finance.

“Islamic banks should not compete or compare themselves with conventional banks,” he suggested and cautioned that financial institutions must not offer services through sub-contractors who lack knowledge of Islamic finance.

A properly developed Islamic financial system can reduce miseries of humanity by bailing out ailing economies in the world claimed the economist.

(Pakistan Observer / 16 May 2012)

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Can Islamic Finance Repair The Modern Financial System?

With Britain now in talks to sell part of the government’s 82 percent stake in the Royal Bank of Scotland to Abu Dhabi sovereign-wealth funds, the Islamic world’s growing financial clout is once again on display. That clout also poses a systemic challenge to the dominant way that finance is now practiced around the world.

From humble beginnings in the 1990’s, Islamic finance has become a trillion-dollar industry. The market consensus is that Islamic finance has a bright future, owing to favourable demographics and rising incomes in Muslim communities.

Despite scepticism regarding accommodation between Islamic and global finance, leading banks are buying Islamic bonds and forming subsidiaries specifically to conduct Islamic finance. Special laws have been enacted in non-Muslim financial centres – London, Singapore, and Hong Kong – to facilitate the operation of Islamic banks and associated financial institutions.

How should these developments be viewed from the perspective of Western finance and mainstream economic analysis? Does Islamic finance really constitute a viable alternative financial system?

The very fact that such a question is asked nowadays is significant. Not so long ago, Islamic finance was superficially dubbed a zero-interest-rate system that would lead to inadequate and inefficient resource mobilization and utilization. Ironically, mainstream central bankers today routinely use precisely such policies when pursuing massive “quantitative easing.”

There are two central precepts of Islamic finance: absolute prohibition on charging interest on financial transactions, and high moral standards on the part of lenders and borrowers. Interestingly, the best economic rationale for a zero-interest-rate system is provided in John Maynard Keynes’s The General Theory:

“Provisions against usury are amongst the most ancient economic practices of which we have record…. In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest.

Keynes suggested that only a very low or zero interest rate could ensure continuous full employment and distributional equity. Keynes’s endorsement of such a policy does not necessarily make it right, but his analysis does suggest that it should be regarded as a serious proposition.

Importantly, although interest is prohibited under Islamic finance, profit is not; the latter is derived from various arrangements that combine finance and enterprise. In essence, this is a profit-sharing and risk-sharing system that is based entirely on equity finance.

Islamic finance thus contrasts with the current dominant system based on interest-bearing debt, in which risks are theoretically transferred to debt holders, but in practice are socialized during crises. Other things being equal, most economists will agree that debt finance leads to greater instability than equity finance.

It follows from the second major tenet of Islamic finance that if people adhered strictly to its ethical requirements, there would be fewer moral-hazard problems in Islamic banking. Moral hazard exists in all systems in which the state ultimately absorbs the risks of private citizens.

But, whether any particular system is efficient in avoiding moral hazard is a matter of practice, rather than of theory. Many would agree that, historically, Christian morality played an important role in the rise of Western capitalism. Secular capitalism, however, has experienced an erosion of values, whereby the financial sector has put its own interests above those of the rest of society. If the ethical values in Islamic finance – grounded in sharia religious law – can further deter moral hazard and the abuse of fiduciary duties by financial institutions, Islamic finance could prove to be a serious alternative to current models of derivative finance.

Moreover, the basic tenets of Islamic finance force us to re-think the ethical basis of modern monetary arrangements, which have evolved into a global reserve-currency system founded on fiat money. In the past, gold had been the anchor of monetary stability and financial discipline, even if it was deflationary.

(Economy Watch / 20 April 2012)

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Pakistan: Implementation of Islamic financial system

LAHORE: Dr Javid Iqbal has said that professionals belonging to the financial system can fulfil the unfinished tasks of Allama Iqbal about the implementation of Islamic Financial System in its true sense.

He was addressing the inaugural session of first ever Pak Finance Conference being held at Aiwan-e-Iqbal, Lahore.

Organised by eTeaM, Pak Finance is Iqbal Academy Pakistan's first major event of the Iqbal Year, as declared by the Prime Minister of Pakistan.

Dr Javid Iqbal said that 'Riba' is haram according to Islamic law but it has been adopted in financial system of a country, which has been set up in the name of Islam.

He said Iqbal was against capitalism but he was not in favour of its complete omission from the society.

In his letters to the Quaid-e-Azam, Iqbal has stressed upon the need for a just social and economic system for the Muslims of the sub-continent.

Tariq Cheema of World Congress of Muslim Philanthropist, USA, who was chief guest, emphasised on collaborating the efforts for the promotion of Islamic Finance and consolidating Muslim Giving.

Consulate General of Iran Bani Asadi was the guest of honour.

Mufti Muneeb-ur-Rehman, Chairman Ruet-e-Hilal Committee presided the concluding session of the Conferene titled Islamic Finance: Breaking Chains of Exploitation and emphasised the need of joint efforts by the Ulema and bankers to develop and adopt a sustainable and comprehensive Islamic Financial Model for the country.

Speakers at the two days conference impressed upon the conference to promote Iqbal's thought on economics, as this is the first major event of the Iqbal Year.

Muhammad Suheyl Umar, Director Iqbal Academy Pakistan said that Pak Finance is a step in the right direction as Iqbal's economic thoughts are usually not deliberated upon.

He said Iqbal had wanted the Muslims to attain a better financial status.

Justice Nazir Ghazi, presiding the session, said interest free banking was in fact according to constitution of Pakistan.

Quaid-e-Azam and Allama Iqbal were also in favour of adopting Islamic financial system.

Dr Anis Ahmed, VC Riphah University, Munir Mansuri (Joint Director SBP), Kashif Siddiqui (Joint Director SECP) and Ms Humour Owais Shahid, spoke about academic, regulators and executive roles and their responsibilities.

Mansuri informed the audience that SBP has provided clear guidelines on different sectors touched upon by the conference eg.

Agriculture, Microfinance and SME.

Humaira agreed to the point of view that the enforcement of legislation in the real challenge that can only be fulfilled with collective efforts of all stakeholders.

Ashraf Bhatti (President Anjuman Tajiran) said that live examples have established the fact that adopting Islamic modes of financing and refusing Riba has resulted in substantial growth of businesses.

Tairq Chaudhry (GM Pak Qatar Takaful) informed the audience how Takaful can protect their lives and assets in an Islamic Way.

Dr Tahir Tanoli (Head Academics Iqbal Academy) and Dr Zeeshan Ahmed (Director Finance LUMS), touched upon the academic areas of the subject matter enlightening the audience about the thought of Iqbal and teaching of Islam that have clearly outlined the social welfare-based Islamic Financial System.

Muhammad Ayub (Director Research RCIB) said that although Pakistan has 98 percent muslim population but Islamic Banking overall share is just 8 percent and a lot needs to be done in this regard.

GM SMEDA Sultan Tiwana informed that in developed world SME contributes upto 50 percent share in GDP and 70 percent of workforce employment.

Without SME growth, Pakistan cannot progress.

Farhat Abbas Shah (CEO Farz Foundation) informed the audience that Farz Foundation is the first Sharia-compliant Microfinance Institution in the world, an honour for Pakistan.

The satisfied women customers of the Foundation also presented their case studies at the Conference.

Munir Chaudhry said that unemployment of youth could be eliminated through adoption of Modarba system.

CEO eTeaM Wahid Noor Malik while thanking the sponsors and supporters outlined the future plans of eTeaM that include running a series of events for promotion of Islamic Finance.

Ubaidullah Naushahi, Executive Director eTeaM said that the aim of the eTeaM is to inculcate Iqbal's teachings in the lives of common Pakistanis enabling them to stand against corrupt system and strive o have a Halal financial system at all levels.

(BusinessRecorder / 02 April 2012)

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The IFSB Council Adopts Two New Guiding Principles for the Islamic Financial Services Industry

The Council of the Islamic Financial Services Board (IFSB) has resolved to approve the adoption of two new Guiding Principles in its 20^th Meeting in Manama, Bahrain today. The two documents are:

IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)

IFSB-13: Guiding Principles on Stress Testing for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)

The 20^th Meeting of the IFSB Council was chaired by H.E. Rasheed M. Al-Maraj,
Governor of the Central Bank of Bahrain and attended by the President of the Islamic Development Bank, and 17 governors and governors' representatives from among the members of the Council. The Central Bank of Bahrain is hosting the 2012 IFSB Annual Meetings.

IFSB-12: Guiding Principles on Liquidity Risk Management for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)

The IFSB-12 delineates a set of guiding principles for the robust management of liquidity risk by institutions offering Islamic financial services (IIFS) and their vigorous supervision and monitoring by supervisory authorities, taking into consideration the specificities of the IIFS, while complementing relevant international standards and best practices. In line with the objectives of the IFSB to support development of a prudent, efficient and resilient Islamic financial services industry, this document outlines 23 Guiding Principles comprising one general principle, 14 Guiding Principles for the IIFS and 8 Guiding Principles for supervisory authorities. These principles aim to provide guidance on effective management and supervision of liquidity risk.

The Guiding Principles for IIFS specify the structure of liquidity risk management process and provide necessary guidance on the identification, measurement, monitoring, control, reporting and mitigation of liquidity risk. The Guiding Principles for supervisory authorities outline important elements of the supervisory framework to monitor the liquidity positions and liquidity risk management framework of IIFS that include, inter alia, initiatives for the development of a robust national liquidity infrastructure, supervisors' contingency planning for IIFS and supervisors' role as provider of Shari`ah-compliant liquidity support to IIFS.

IFSB-13: Guiding Principles on Stress Testing for Institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)

IFSB-13 provides a comprehensive stress testing framework for both IIFS and supervisory authorities. The 29 Guiding Principles in IFSB-13 aim to provide a set of guidance intended to complement the existing international stress testing framework taking into consideration the specificities of IIFS as well as the lessons learned from the financial crisis so as to contribute to the soundness and stability of the IIFS, in particular, as well as the Islamic financial services industry as a whole.

The 22 Guiding Principles which provide a framework for IIFS are aimed to guide these institutions in assessing and capturing vulnerabilities under various stress-testing scenarios including extreme but plausible shocks, in order to achieve the following, inter alia, to identify how many different portfolios respond to changes in key economic variables, to evaluate potential threats to the IIFS's ability to meet its financial obligations at any time arising from either funding or market liquidity exposures and to analyse the IIFS's ability to meet its capital requirements at all times throughout a reasonably severe economic recession.

The seven Guiding Principles for supervisory authorities can be used as a surveillance tool for periodically testing the safety and soundness of the financial system (including IFSI), from a financial stability perspective, and to identify "weaknesses" in the financial system and structural (systemic) vulnerabilities arising from the specific risk profiles of IIFS individually and collectively. They are also beneficial as a supervisory tool for designing macro-prudential policies.

These two documents will be available on the IFSB website, www.ifsb.org in due course.

-Ends-

About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation 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 organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players.

The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organisations and market players, professional firms and industry associations.

(Press Release IFSB / 29 March 2012)

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