IFSB issues WP on role of deposit insurance schemes
KUALA LUMPUR, March 31: The Islamic Financial Services Board (IFSB) is pleased to announce the issuance of a Working Paper on ‘Strengthening the Financial Safety Net:
The Role and Mechanisms of Shariah-Compliant Deposit Insurance Schemes (SCDIS)’ (WP-06) today.
IFSB WP-06 sheds light on the principles, and existing institutions, through which deposit insurance schemes (DIS) are provided on a Shariah-compliant basis. DIS are considered an indispensable component of the new global financial stability framework post-financial crisis, in which the role of financial safety nets in the banking sector have gained widespread acceptance. DIS have been instituted explicitly in at least 113 juris- dictions worldwide. WP-06 observes a major shift in the DIS design features, post-financial crisis, as a number of elements advocated in the past literature were found to be detrimental to financial stability and were among the factors judged to have undermined depositorsí confidence.
WP-06 states that extending conventional DIS protection to Islamic banks presents several key challenges, which include (1) issues in the underlying principles of conventional deposit insurance (excessive Gharar, Riba, amongst others); (2) the treatment and insurability of deposits accepted under profit-sharing contracts; (3) the priority of claims of different types of deposits collected by Islamic banks; and (4) the role of the deposit insurance fund in resolution.
Drawing upon survey results conducted across 27 IFSB member regulatory and supervisory authorities (RSAs), WP-06 identifies four jurisdictions where SCDIS are already implemented and in effect. Additionally, a fifth jurisdiction has drafted its modality and corresponding law for an SCDIS and this is expected to be in operation in the very near future. The IFSB survey and follow-up communications with these five jurisdictions have also indicated variations in the operational practices of these respective SCDIS including, among others, the governance structures, investment strategies, risk assessment frameworks and coverage limits of the deposits protected.
WP-06 goes on to identify the differences in the treatments of SCDIS coverage for profit-sharing investment accounts (PSIA). Subject to various terms and conditions, one out of the five jurisdictions with SCDIS does not provide any coverage to PSIAs; two out of five jurisdictions cover only unrestricted PSIAs and not restricted PSIAs; and the last two jurisdictions cover both unrestricted and restricted PSIAs. There are also important differences in terms of rules related to the parties (i.e. IIFS, Central Banks, depositors’, etc.) that will pay the contributions for coverage to the SCDIS.