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Sunday, 1 April 2012

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 20th 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 20th 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, in due course.
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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Islamic banking is not for Muslims alone

Although the word ‘Islamic’ refers to beliefs specifically related to Muslims, it is a different case altogether with Islamic banking and finance. It is a sophisticated banking and finance structure based on moral and social values, which is compatible with the modern day financing needs, and hence, is receiving overwhelming response from Muslims and non-Muslims alike. Sometime ago, the Pope’s official newsletter, L’Osservatore Romano, published an article praising the ethical concepts of Islamic banking and finance and encouraging western banks to adopt the rules of Islamic banking and finance to restore confidence amongst their clients during the economic crisis.
Not only the Pope, several leading educational institutions have also advocated Islamic banking and finance by introducing courses on the subject. Harvard had set up its Islamic Finance Project way back in 1994-95, followed by several other premier educational institutions worldwide. Apart from this, several governments are taking efforts to benefit from the multifold advantages of the Islamic banking and finance system. Countries like the United Kingdom, Luxembourg, North Ireland, Germany, Bermuda, France, Malaysia, Indonesia, Maldives, Turkey, Singapore, the entire Middle East, Japan and Australia, etc are now well-known names in this regard.
Countries like Luxembourg, Bahrain, and Malaysia, etc have developed a robust infrastructure of Islamic banking and finance system, and it is pertinent to note that Luxembourg last year reported the world’s highest per capita income, whereas Malaysia is fast on its way to becoming a developed nation. It is noteworthy that while Luxembourg has a very small population of Muslims, Malaysia, a Muslim-dominated country, has more than 40% non-Muslim account holders in Islamic banks. It is due to its economic benefits that all these countries, irrespective of the size of their Muslim populations, are trying out different ways to become leading centres of Islamic banking and finance. Likewise, there has been a surge in the number of non-Muslim professionals providing Islamic banking and financial services throughout the world, undoubtedly stressing that the importance and advantages of Islamic banking and finance stretch far beyond its name.

The recent past has shown that while the world faced severe economic crisis, Islamic banks continued to grow unabated, making the world take note of this lesser known field. Islamic banking and finance has now become a confident part of the world economy with more than 75 countries joining this industry, which is growing at about 20% to 30% annually.
India, which happens to be home to approximately 150 million Muslims, is seen as the largest untapped market for Islamic banking and finance. There have been growing demands from various sections of the Indian society, especially the economists and businessmen for the introduction of Islamic banking services in India for the past few years, and some efforts have made in this regard. However, there seems to be a lack of awareness among the masses as well as policymakers in terms of its application and benefits. One positive step in this direction came from the Kerala government, which participated in an Islamic finance venture in the state, inviting much needed investment. With the green signal to the project in Kerala, it quickly received investment offers worth Rs100 billion from Oman alone to invest in vital developmental projects including roads, bridges, flyovers, power, water supply and transport, industrial and information technology, tourism, ports, airports, railways and mass transportation and inland waterways across the state, etc. It is a good development towards opening the doors for much-needed investment in India, and promoting an equitable banking structure that will benefit all, irrespective of the religious beliefs of the customers.
India is among the fastest growing economies and shall be a leading economy of the world by 2020; however, to achieve this, it is high time India took some proactive steps in this direction, including policymaking and introducing Islamic banking and finance courses in various institutions to educate the masses besides preparing quality professionals to cater to the growing demand. As per reports, India needs about $500 billion to invest in projects crucial for building its vital infrastructure. The introduction of Islamic banking can easily provide this much-needed money, especially from the oil rich Gulf nations with billions of petro dollars looking for new markets. The importance of Islamic banking and finance is increasing and its integration in the mainstream economy is too big to avoid. It is high time Indian policymakers provided for integration of Islamic banking and finance in the system. If India’s infrastructure develops, every Indian will benefit, irrespective of one’s religious beliefs.

(by Faizy Syed / Daily News & Analysis / 30 March 2012)

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