IFSB holds seminar on Islamic finance and global regulation
Event co-hosted by Central Bank of Iran and Bank Negara Malaysia
KUALA LUMPUR, April 11: The Islamic Financial Services Board (IFSB) successfully organised a Seminar on Islamic Finance and Global Regulation themed, Moving Targets and New Horizons on 4 April 2017 in Kuala Lumpur, Malaysia. This Seminar was held as part of the IFSB Annual Meetings and Side Events 2017, which the Central Bank of Islamic Republic of Iran and Bank Negara Malaysia co-hosted.
This one-day seminar aimed to provide an interactive environment enabling speakers and participants to explore issues and share ideas around regulation and expanding outreach of Islamic finance, bringing together regulators, market players, academics, rating agencies and other stakeholders of the industry.
HE Dr Akbar Komijani, Deputy Governor, Central Bank of the Islamic Republic of Iran (CBRI), in his Keynote address explained how the global financial crisis (GFC) had shed light on the complexities and interlinkages within the financial system, which shifted global regulatory focus to macroprudential policy and financial stability. Similarly, better alignment and more coordinated approach has been taken by various international standard setting and supervisory bodies in terms of the issuance and implementation of standards and guidelines. He also stated that amongst various global regulatory reforms and associated higher indicators, Islamic finance also has to contend with its own obstacles, notably the lack of liquidity instruments.
Dr Komijani also spoke about CBRI’s intentions to issue more Islamic instruments to facilitate monetary and fiscal policy in the country. The IFSB’s technical assistance and implementation work was noted as being key facilitator for the industry and for member jurisdictions. He also proposed the IFSB to coordinate the set-up of a consultancy group, leveraging from skills of its members, to aid and assist development of Islamic finance in various member jurisdictions.
In his welcoming remarks, Mr. Jaseem Ahmed, Secretary-General of the IFSB, welcomed the participants to the Seminar and expressed his thanks to Bank Negara Malaysia and CBRI for hosting the event. His speech focused on two key themes namely Islamic finance and global regulatory changes, and new horizons such as FinTech and financial inclusion. Jaseem stated that the Islamic financial services industry (IFSI) is now worth almost USD 2 trillion globally and has achieved domestic significance in 12 jurisdictions. In line with the global regulatory reforms, the IFSB has issued a number of prudential standards across all sectors to compliment the work of comparator standard setters such as the Basel Committee, IOSCO and the IAIS. The implementation of these standards has helped the member regulatory and supervisory authorities to align their regulatory regime with global best requirements, helping the market players to effectively manage their risks. He also observed that many post-GFC reforms are still being implemented globally and there are continuing difficulties for the Islamic finance industry in respect to liquidity and liquidity coverage ratio compliance due to the lack of Shariah-compliant high quality liquid assets.
Jaseem also welcomed the IMF Executive Board’s announcement with regard to its consideration of a formal recommendation for the endorsement of IFSB-17 (Core Principles for Islamic Finance Regulation for Banking Segment) in 2018.
On the second theme of moving targets and new horizons, Jaseem noted the emergence of FinTech and more recently, P2P and Crowdfunding platforms. While the potential benefits of this phenomenon are enormous for financial inclusion and wealth creation, it also presents new challenges for financial stability generally. For Islamic finance, which is grounded on Shariah principles, further thinking will be required on the specific exchange contracts presented by the FinTech model, as well as block chains and smart contracts. He highlighted that chapter 4 of the upcoming IFSB’s Stability Report 2017 will include a discussion on these issues. He also announced that the IFSB is planning to launch a Technical Note on the theme of financial inclusion and the role of Islamic finance, later this year.
The first session of the Seminar, themed, The Roll Out of Regulatory Reforms – Progress so Far and What is Left to Do? was chaired by Madelena Mohamed, Director, Prudential Financial Policy, Bank Negara Malaysia.
The speakers for this session were Dr Yakup Asarkaya, Vice Chairman, Banking Regulation and Supervision Agency, Turkey and Suliman Aljabrin, Head, Banking Prudential Regulations Division, Saudi Arabian Monetary Authority (SAMA).
Madelena Mohamed echoed the theme of the GFC and many of the regulatory reforms that have been undertaken. Globally, capital adequacy ratios have doubled and leverage has halved. There is also more lending to the real economy at a lower rate (although this may also be due to the low interest rate environment) and SMEs. The Chair also repeated the promotion of financial stability that IFSB standards provided.
During the session, both speakers provided an overview of the banking sectors in their home jurisdictions and updated on regulatory forms being undertaken. Turkey is aiming to increase Islamic banking share of assets from 5% (currently) to 15% by 2021 alongside the full implementation of new Basel rules. Saudi Arabia has also implemented new regulatory reforms on capital, liquidity and leverage. From a FinTech perspective, SAMA has adopted the ‘sandbox approach’, allowing providers to experiment whilst still remaining cognisant of financial stability.
Key discussion points from the session highlighted structural liquidity as being a major ongoing issue for Islamic finance. The IFSB has incorporated the Alternative Liquidity Approach into its GN-6 for this reason. SAMA stated that this was also an issue for conventional banks given Saudi Arabia has not historically issued much sovereign debt. The speakers recognised regulatory fatigue could be a pressure for the market and that strong communication was needed between regulators and the market players.
The regulatory reforms have however driven financial institutions to become more innovative, with FinTech being rapidly embraced by many players.
The second session, themed Developing Liquid Islamic Money Markets: Challenges in Harmonisation and Local and International Issuances was chaired by Mohd Radzuan Ahmad Tajuddin, General Manager and Head, Islamic Capital Market & Market Development, Securities Commission Malaysia and the speakers include Abdoul Aziz Ba, Acting Chief Executive Officer, International Islamic Liquidity Management Corporation and Khalid Howladar, Founder & Managing Director, Accreditus, United Arab Emirates.
Radzuan provided a brief overview of how Malaysia established its Islamic liquidity market, beginning in 1983 with the first government issuance, up to the present times.
Khalid stressed liquidity risk as being the most prominent for all banks, which is even more poignant for Islamic finance players where there is a lack of Shariah-compliant liquid assets. A harmonised global liquidity pool is needed for this reason. Khalid also explained that recent GCC sovereign debt issuances were seem to be driven by desire to access funds from international sources rather than internally.
Abdoul Aziz emphasised that the IILM was created to help address some of the discussed liquidity issues for Islamic banks. The IILM structures short-term sukuk through pooling assets from various obligors and then using primary dealers across the GCC and Asia to act as market makers. Current outstanding IILM sukuk stands at approximately USD 760 million.
The key discussion points highlighted the need for more local currency sukuk issuances, especially in the GCC given the long term outlook for oil and the plan to relatively open the foreign exchange regime. The issue of harmonising Shariah in sukuk issuances for developing a cross-border market was reiterated. Demand for sukuk on a larger scale is still lacking in some markets despite tightening of price spreads between bond and sukuk issuances. Economic incentives such as tax breaks are important to increase this demand.
Wider Outreach for the IFSI and Structural Challenges was the third session of the Seminar. The chairperson for this session was Zahid ur Rehman Khokher, Assistant Secretary-General, IFSB with distinguished speakers including Paul Muthaura, Chief Executive, Capital Market Authority, Kenya, Minorhadi Mirhassan, Head of Government Relations and Special Projects, Bank Islam Brunei Darussalam and Professor Dr Nafis Alam, Professor of Finance, Sunway University Business School, Sunway University, Malaysia.
Zahid spoke on how outreach Islamic finance outreach can be increased across the start-up and SME sectors, which generally struggle for access to funding. This gap in turn offers opportunities for FinTech companies which have grown rapidly in the last few years and may provide the platform for further Islamic Finance growth. He emphasised that the risks presented by the emergence of Fintech, however, need to be understood and managed in parallel with its rapid growth.