IFSB issues paper on Islamic Finance Regulation 

The Working Paper is issued in parallel to the Exposure Draft (ED-17) of the Standard on Core Principles for Islamic Finance Regulation (Banking Segment), and provides the background and wider context for the Standard that is under preparation by an IFSB Working Group.

The Working Paper (WP) assesses in full the Core Principles issued by the Basel Committee for Banking Supervision (BCBS), the International Organization for Securities Commissions (IOSCO), as well as those issued by the International Association of Insurance Supervisors (IAIS).

“The key objective was to analyse the applicability and relevance to the prudential regulation and supervision of Islamic finance of the Core Principles of the international standard-setting bodies for conventional financial system”, said Mr Jaseem Ahmed, the IFSB’s Secretary-General. In particular, the WP provides a principle-by-principle gap analysis of these Core Principles and explains whether: (a) the existing principles are fully applicable; (b) they require modifications or adjustments; or (c) new principles are needed.

“The analysis indicated many areas of relevance, but it also underscored the importance of having additional principles to cater for the specific nature of products and the balance sheet structure of institutions offering Islamic financial services (IIFS),” the Secretary-General added.

Core Principles for various sectors in the financial system have become a standard tool to guide regulators and supervisors in developing their regulatory regimes and practices. They also serve as a basis for assessing the strength and effectiveness of regulation and supervision by either the regulatory and supervisory authorities themselves or by the external parties such as the International Monetary Fund and World Bank under their FSAP programme.

In this respect, in addition to the Core Principles of the three major international standard-setters – the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) – Core Principles are also available for deposit insurance, financial market infrastructure and financial conglomerates, amongst others.

It is expected that Core Principles for Islamic Finance Regulation will facilitate the work of supervisory authorities that are new to the regulation and supervision of Islamic financial services and who face challenges in identifying applicable principles and benchmarks for assessing the gaps in their existing regulatory policies and regulations, while addressing the specificities of Islamic finance. The differences in the operational and Shari’ah characteristics of Islamic finance products in various jurisdictions highlight the need for international standardisation of the prudential framework.

In order to study the existing global Core Principles and prepare a new standard on IFSB Core Principles for Islamic Finance Regulation, the IFSB Council, in its 21st Meeting held on 12 December 2012, approved the establishment of a Working Group for this purpose. At its second meeting held on 16 September 2013, the Core Principles for Islamic Finance Regulation Working Group discussed an Initial Study Report, which analysed the applicability of three main Core Principles – issued by the BCBS, IAIS and IOSCO – on Islamic financial sector.  Due to the relative size and significance of Islamic banking sector, the Working Group agreed to initially focus on developing Core Principles for Islamic banking segment, with an aim to subsequently develop Core Principles for the other sectors of the Islamic financial services industry (IFSI). The Working Group also agreed to publish the findings of the Initial Study Report in the form of a Working Paper. The IFSB has already issued an Exposure Draft of its standard on Core Principles for Islamic Finance Regulation for banking segment (ED-17) for public consultation, which begins from 31 October 2014 until 5 January 2015.

In line with ED-17, with respect to Core Principles issued by the IAIS and IOSCO, this Second Working Paper has also expanded gap assessment carried out by the IFSB and these standard setters in earlier publications, namely, the IFSB–IAIS Issues in Regulation and Supervision of Takaful (Islamic Insurance) (2006); IOSCO Islamic Capital Markets Fact Finding Report (July 2004) and Analysis of the Application of IOSCO Objectives and Principles of Securities Regulation for Islamic Securities Products (September 2008). The present analysis in this publication builds on, and broadens the scope of, these previous exercises. In particular, this is the first comprehensive assessment of the Revised Core Principles of the BCBS for their applicability to Islamic finance.

It is expected that after the final issuance of IFSB-17 (Core Principles for Islamic Finance Regulation for Banking Segment) in 2015, Core Principles will be prepared for other segments of the IFSI. Therefore, the gap assessment provided in the Second Working Paper with regard to the IAIS and IOSCO Core Principles for applicability to Islamic finance, will be further expanded in the course of the future work of the IFSB.

Source: cpi financial – IFSB issues paper on Islamic Finance Regulation

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