By Mushtak Parker
ISTANBUL — "The Basel III rules are almost rendered meaningless without effective supervision. They should be implemented in full on a timely and sustainable basis," said William Coen, Deputy Secretary General of the Basel Committee on Banking Supervision, Bank of International Settlements (BIS), the group of 27 Governors of Supervisory Authorities that set the rules of the game for international banking.
This is a challenge for any standard-setting body in international financial services, including IOSCO (International Organization of Securities Commissions), IASB (International Accounting Standards Board), IFSB (Islamic Financial Services Board), and AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions).
Basel’s strength as a rule-making body has been its success in reaching agreement on implementation of these rules, especially capital framework and risk management, through joint voluntary measures, and also serving as a platform for cooperation and sharing of experiences between supervisors and regulatory authorities.
This process has led to the development of a dense and close network of personal and institutional relationships amongst regulators and heads of supervision globally.
Jaseem Ahmed, Secretary General of the IFSB, conceded that the Basel implementation process "is a formidable achievement, and the IFSB has some way to go to arrive at this kind of consensus and effectiveness."
To date, the IFSB has published 13 Standards, 4 Guidance Notes and 1 Technical Note. Some 9 members of the IFSB has adopted three each of the Standards to date with Malaysia in the process of adopting another two. Another 19 members have indicated that are in the process of or may adopt up to three standards each.
"The benefits provided by the IFSB’s issuance of global standards will not be realized unless the standards are implemented, on a consistent basis, across jurisdictions. Implementation is underway, although it is at different stages in different jurisdictions. Fully half of our jurisdictions have plans, framed over a 3-5-year period, to implement our standards in part or full. It is incumbent upon the IFSB to develop measures to aid this process," Jaseem said.
Ideally it would be great to expect the IFSB process to have the same success as Basel, which has a fully-fledged Standards Implementation Group. But the reality is that the culture of voluntary adoption of standards amongst the overwhelming majority of the IFSB member jurisdictions is woefully under-developed.
On the other hand, Basel is supported by a political process at the highest level of the global economic and financial policy architecture, the G20 process, of which three IFSB jurisdictions — Saudi Arabia, Indonesia and Turkey — are also members.
There is no equivalent political process that supports the Islamic finance industry.
However, help may be on the way to boost the implementation and adoption of IFSB Standards through the Financial Sector Assessment Program (FSAP) of the World Bank/International Monetary Fund (IMF).
The World Bank Group has been actively engaging with the Islamic financial system through its increasing links with the IFSB and the Islamic Development Bank (IDB) Group.
The World Bank/IMF is now including adherence to IFSB prudential and supervisory standards in its FSAP, which currently comprise three components — one which assesses whether jurisdictions are in compliance with the ‘Basel Core Principles For Effective Banking Supervision’; one which assesses whether jurisdictions are in compliance with ‘The IOSCO Objectives and Principles of Securities Regulation — Report on Standards and Codes (ROSC)’; and the third which is an update on the jurisdiction’s ‘Financial System Stability Assessment.’
“As the size of the Islamic finance industry grows,” said Dr. Mahmoud Mohieldin, Managing Director of the World Bank in Istanbul last week, “so does the urgency of upgrading the institutions and approaches supporting the industry. The World Bank/IMF this year included a specific component for the first time in a Financial Sector Assessment Program (FSAP), the one currently being com pleted in Malaysia. This is in recognition of the significant share of the sector accounted for by the Islamic financial institutions in Malaysia.”
But a senior member of the World Bank/IMF Islamic Economics and Finance Working Group (IEFWG) explained to Saudi Gazette that assessment on the adoption and implementation of IFSB and other Islamic financial and accounting standards can only be conducted by the FSAP assessors if a jurisdiction has actually adopted the standards.
The IEFWG seeks to provide support to the industry in capacity building and knowledge management; engagement on policy directions in market development, regulation, standard setting and new financial products; diagnostic and analytical work in Islamic finance; and technical assistance on issues relating to legal, regulatory and institutional frameworks as well as compliance with standards.
If one compares the FSAPs conducted by the World Bank/IMF assessors on Saudi Arabia and Malaysia, the results could not be more stark. The latest FSAP Update on the Kingdom, published in April, predictably does not cover adherence to IFSB or AAOIFI Standards, in addition of course to the Basel III or IOSCO Core Principles.
In contrast Malaysia, which hitherto has refused to submit to a FSAP, even though the World Bank/IMF has been trying to get Bank Negara Malaysia, the central bank, to agree to one for the last decade or so, is now extremely confident of subjecting its banking and securities sector regulation and supervision to rigorous scrutiny.
In fact, Bank Negara agreed to the FSAP on condition that the World Bank/IMF send their very senior assessors to conduct the assessment.
This confidence not only covers the conventional financial sector but most importantly the country’s Islamic finance industry, which from a systemic point of view has probably got the most advanced infrastructure in place in the world.
Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, who herself was grilled by the assessors, is confident that the reputation of the Malaysian financial sector and its regulation and supervision will come out enhanced as a result of the FSAP, whose findings will be published in August this year.