LONDON — If its achievements in the past decade are anything to go by, then the next ten years augurs well for the Islamic Financial Services Board (IFSB), the multilateral prudential and supervisory standard-setting body for the global Islamic financial services industry.
The Board, which was established on Nov. 3, 2002 in Kuala Lumpur by a Group of central banking and regulatory authorities including the Saudi Arabian Monetary Agency (SAMA) and Bank Negara Malaysia, no doubt thinks that the IFSB deserves the accolades for the tireless work its officials, committees and supporters have put in over the last decade.
In many respects sustainability of a mission statement and mandate is more difficult to maintain, especially if there is change at the top of the managerial tree and there is ongoing flux in the global, regional and even national environments in which Islamic financial institutions operate.
In the case of the IFSB, its future success and challenges will be subject to numerous caveats, partly dictated by regulatory and compliance developments in the international financial system especially in the Basel III Process, and partly dictated by market developments and the politics of multilateral Pan-Islamic organizations.
One just has to look at the recent developments at the International Islamic Liquidity Management Corporation (IILM), when SAMA suddenly divested its equity subscription from the multilateral body mandated to introduce a cross-border short-term liquidity management mechanism for the global Islamic finance industry.
Nevertheless, the IFSB has in the past been trumpeted perhaps far too prematurely as the Basel Committee for the Islamic financial services industry. The pragmatic current Secretary General Jaseem Ahmed, a seasoned former senior development banker at the Asian Development Bank, is more cautious and sees the work of the IFSB more of complementing that of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors — the three premier prudential and supervisory bodies serving the banking, capital market and insurance industries respectively.
Ambitions of course are eminently suitable as long as they are tempered with reality and do not raise expectations too much. But, to have a fair chance to put them in effect, a conducive organizational structure and resources are vital prerequisites.
The IFSB is constrained by the nature of its resource mobilization structure, which is based on membership fees rather than equity subscriptions. The Board is domiciled in Malaysia, which is a proactive supporter of the Islamic finance industry and which enacted a special law — the Islamic Financial Services Board Act 2002 — that gives the IFSB (some would say generous) immunities and privileges that are usually granted to international organizations and diplomatic missions.
Article 4 (a) of the IFSB Articles of Agreement states that the main objective of the Board is “to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Shariah principles, and recommend these for adoption.”
One of the ongoing challenges for the IFSB is indeed the adoption and implementation of its standards, guidance papers and notes, and technical notes. The best way to leverage the demonstration effect of IFSB Standards and Notes is to press ahead with a more aggressive implementation and adoption strategy.
Ahmed is very aware of this challenge and is adopting an implementation framework and strategy to that of the Basel Committee. The major difference is that the culture of voluntary adoption amongst the major industrialized members of the Basel Committee is highly developed, whereas in the Muslim world they remain underdeveloped. The IFSB is confident that some 20 countries have or are in the process of adopting and implementing its standards. This would be a major achievement for the IFSB.
A recent suggestion from a senior official of the Central Bank of Bahrain (CBB) is also worth noting. He urged that IFSB Standards and Guiding Principles should become compulsory for all OIC member countries. For this to happen, however, there will have to agreement at pan-government level.
Similarly, while reaching out to various regions, including non-traditional ones for Islamic finance in Asia and Europe, the Board has neglected natural constituencies in Africa and new ones further afield in North and South America. This of course depends on the willingness of these regions to engage and reciprocate with the IFSB.
There are IDB members in North, South, East and West Africa. Africa is supposed to be the next major frontier for Islamic finance market penetration. As such the IFSB reach tends to be more GCC, Europe and Asia-centric.
The IFSB also needs to engage far more creatively with its most natural constituency — the market players in the Islamic finance industry — a perennial complaint from the Islamic financial institutions is that IFSB summits tend to be incestuous and there is nothing for market players to engage in.
As such the IFSB summits should promote far more direct engagement between the market players and the IFSB’s constituent regulatory authorities.
In an ever-changing international financial architecture, the IFSB Governing Council should seriously consider widening the mandate of the Board to include allied objectives such as issuing a Guiding Principle on the Authorization of Islamic Financial Institutions. If there were a uniform model then it would indeed assist and complement the adoption of the various Guiding Principles on prudential and supervisory issues. In any case the IFSB has issued such Principles on Corporate Governance and Shariah Governance, which are not core prudential matters.
The message here is that of greater relevance to the realities of how Islamic finance is practiced in a Club of Countries that have very disparate political, economic and financial governance and market cultures in place. One way of narrowing the gap and leveling the playing field is to have a wider range of allied Standards or even Notes that should be universally applicable akin to the Basle Core Principles for global banking.
Market education is another ongoing challenge for the IFSB and the Islamic finance industry in general. Banking is not all about servicing the financial institutions and their shareholders. It is equally important about serving the economy and customers, whether through greater emphasis on real economy financing; consumer protection and education; and through financial inclusion.
The level of ignorance about Islamic banking and finance amongst some regulators, the ordinary man and woman in the street, the financial media and even the unqualified Shariah scholar (in Fiqh Al-Muamalat), is both breathtaking and disconcerting. All this begs for a series of Guiding Principles or Notes on market education and financial inclusion.