12th IFSB Summit Discusses the Core Principles for Islamic Finance Regulation and Reiterates Importance of Regulatory Cooperation for Cross-Border Integration

25 May 2015, Kuala Lumpur

Thought leaders and key players of the Islamic financial services industry (IFSI) shared their views on the industry's regulatory and supervisory issues at the 12^th IFSB Summit, themed "Core Principles for Islamic Finance Regulation: Integrating with the Global Regulatory Framework". The Summit was held on 20 and 21 May 2015 in Kazakhstan, and hosted by the National Bank of Kazakhstan.

The first session, themed, "Global Overview of the Islamic Financial Services Industry (IFSI): Trends and Policy Developments", was chaired H.E. Mubarak Rashed Khamis Al Mansoori, Governor of the Central Bank of the United Arab Emirates. The speakers in the session were H.E. Dr. Ishrat Husain, Former Governor of State Bank of Pakistan, Dean and Director of Institute of Business Administration, Pakistan, Ananthakrishnan Prasad, Mission Chief, Middle East and Central Asia Department, International Monetary Fund and Boris Kopeykin, Senior Director and Analytical Manager for Financial Institutions in Russia and the CIS , Standard & Poor's, Russia.

The speakers provided an overview of the current stage of development and new initiatives being taken all over the world by policy makers to strengthen the legal and regulatory frameworks in Islamic finance. They noted that these developments will help improve the performance and potential growth of the IFSI. Dr. Ishrat Husain, as a founding governor of the IFSB, noted with satisfaction the significant progress made by the IFSB in the issuance of standards, inclusive of the standard for Core Principles for Islamic Finance Regulation (CPIFR). Together with other speakers, he also stressed key policy issues such as challenges with regards to safety nets (Shari`ah-compliant deposit insurance system and lender of last resort facilities), liquidity management, the macro prudential policy framework as well as tax policy. Addressing these challenges will require concerted efforts by various stakeholders, including national governments. Mr. Prasad presented an overview of Islamic finance developments, saying that Sukuk could play an important role in financing infrastructure, and that Islamic finance could assist in bolstering financial stability. However, significant gaps remain in the legal and regulatory frameworks. The speakers also highlighted key steps and measures which are needed to support the growth of Islamic finance in CIS countries and other regions. These include, among others, the enabling regulatory framework, as well as access to qualified and skilled human resources. Moreover, there was a consensus on the need for a surveillance framework for Islamic finance and, in this regard, the role of the CPIFR to serve as the basis for the next phase of the Islamic finance industry development becomes more pertinent and relevant.

The second session, themed, New Regulatory Developments and the Impact on the Islamic Financial Services Industry, was chaired by H.E. Dr. Abdulrahman Al Hamidy, Director General and Chairman of the Board, Arab Monetary Fund. The speakers in the session were Jaseem Ahmed, Secretary-General (SG), IFSB, H.E. Saeed Ahmad, Deputy Governor, State Bank of Pakistan and Badru Jaffar Swaleh, Head of the Shariah Department, First Community Bank, Kenya.

The speakers highlighted the new developments in the regulatory landscape which seek to promote financial stability, with a special focus on the implementation of new IFSB standards on liquidity and capital adequacy that complement the global regulatory reforms in these areas. In this respect, speakers outlined the key features of Shari`ah-compliant Additional Tier 1 and Tier 2 capital instruments and macroprudential policy tools which have been prescribed in the IFSB's Revised Capital Adequacy Standard (IFSB-15). There was a consensus that new liquidity ratios such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) pose major challenges for the industry due to the scarcity of Shari`ah-complaint High Quality Liquid Assets (HQLA) in most jurisdictions. However, the IFSB's SG, Jaseem Ahmed noted that the IFSB's dialogue with the Basel Committee had resulted in the recognition of the need to provide flexibility to Islamic finance jurisdictions. This is reflected in IFSB's Guidance Note 6, Quantitative Aspects of Liquidity Management, where regulatory authorities can exercise their judgement, within specific parameters, on the specification of level 1 and level 2 assets. Deputy Governor Saeed Ahmad shared with the delegates the commitment of the Government of Pakistan in developing Islamic finance in Pakistan; while Mr Badru Jaffar Swaleh shared the opportunities for the Islamic finance industry to grow in Africa, and specifically in Kenya. The speakers noted that while the Islamic finance community has made some important strides, more work remains to achieve an appropriate balance between preserving the safety and soundness of the financial system and allowing financial institutions and markets to perform their intended functions. Additionally, the capacity building needs of the industry players and their regulators, which is essential for the industry to meet the growing demands posed by regulatory changes, requires greater attention.

The third session, themed Role of the Core Principles for Islamic Finance in Enhancing Regulatory Consistency and Resilience of the Industry", was chaired by H.E. Dr. Maher Sheikh Hasan, Deputy Governor, Central Bank of Jordan. The speakers in the session were Prof. Dr. Necdet ?ensoy, Board Member, Central Bank of the Republic of Turkey, Dr. Ali Al Amari, Senior Director, Qatar Financial Centre Regulatory Authority, and Peter Casey, Consultant to the IFSB.

The speakers in this session explicated the need of the industry to have a minimum international standard on the key principles of sound regulatory and supervisory practices to promote effective supervision of the institutions offering Islamic financial services. In this regard, they lauded the efforts of the IFSB in issuing its CPIFR in April 2015. It was noted that the CPIFR had taken on board, without amendment, only nine of the 29 Revised Basel Core Principles. Basel's Core Principle 23 for interest rate risk had been dropped, as it was not applicable to Islamic finance, and four additional Core Principles had been provided, covering such issues as the Shari`ah governance framework, windows, etc. In line with the CPIFR, the speakers stressed that certain necessary measures have to be taken by the regulatory and supervisory authorities in order to bring the Islamic financial services industry to the next level of development by enhancing consistency, not only in the supervision sphere, but also in the implementation of global standards across borders. The delegates were also informed of the current work of the regulatory and supervisory authorities on the identification of necessary changes, as well as measures undertaken, in the local regulations in complying with the CPIFR. This was complemented by updates on the current Islamic finance infrastructure, its future plans and outlooks in Turkey and the Gulf countries, with special focus on Qatar.

The fourth session, themed Enabling Framework for the Assessment of Regulatory and Supervisory Regimes and was chaired by Prof. Dr. Necdet ?ensoy, Board Member, Central Bank of the Republic of Turkey. The speakers in the session were H.E. Dr. Ishrat Husain, Former Governor of State Bank of Pakistan, Dean and Director of Institute of Business Administration, Pakistan, Bakarudin Ishak, Assistant Governor, Bank Negara Malaysia and Dr. Zamir Iqbal, Lead Financial Sector Specialist, The World Bank Global Islamic Finance Development Center.

The speakers stressed, amongst other issues, the importance of the enabling environment and the need to facilitate the development of a surveillance infrastructure for Islamic finance. Dr. Husain proposed a 12-point agenda for creating an enabling environment, which included among others, i) the policy commitment at the national level, ii) the need for a comprehensive legal framework that could effectively cater to the specificities of the IFSI, iii) the need for inexpensive dispute resolution mechanisms, iv) attention to consumers and depositors' protection and v) regulations to address insolvency and taxation regime issues. This sentiment was shared by Mr. Ishak, who presented Malaysia's experience in undertaking a consistent, pragmatic approach towards developing a robust IFSI by having in place a well-connected Islamic finance ecosystem to ensure a sustainable industry growth. This is supported by institutional development through a diversified range of institutions offering Islamic financial services in the market, dedicated legal and Shari`ah-complaint frameworks, active role by the central bank as the Lender-of-Last-Resort (LOLR), creation of Islamic money market and secondary market for Sukuk infrastructures, in addition to talent development initiatives in disseminating knowledge and awareness about Islamic finance among the industry practitioners and the public. He also shared the salient features of the new Investment Account Framework in Malaysia that is supported by an enabling regulatory regime as well as an industry-led initiative on an Investment Account Platform that aims to facilitate its efficient operationalisation by linking investors with prospective ventures. The speakers proposed for the Regulatory and Supervisory Authorities (RSAs) to become more proactive in adopting the Standards issued by the IFSB and other standard setting bodies in the Islamic financial services industry.

The final session of the Summit was a Panel Discussion themed The New Silk Road: The Importance of Regulatory Cooperation for Cross-Border Integration and was chaired by H.E. Nurlan Kussainov, Deputy Governor, National Bank of Kazakhstan. The panellists in the discussion were Khaled Mohammed Al Aboodi, Chief Executive Officer & General Manager, Islamic Corporation for the Development of the Private Sector (ICD), Daud Vicary Abdullah, President and Chief Executive Officer, International Centre for Education in Islamic Finance, (INCEIF), Malaysia, and Jean-Marc Goy, Counsel for International Affairs, Commission de Surveillance du Secteur Financier, Luxembourg.

The Panel deliberated on the challenges and opportunities offered by the new Silk Road and the emerging Islamic finance jurisdictions such as Kazakhstan and the CIS region, in general, as well as the importance of regulatory cooperation to grow and develop the IFSI in a manner that prospectively promotes cross-border integration. The unique value proposition of Islamic finance such as the elements of underlying assets and risk sharing in economic transactions as well as diversification of types of Shari`ah-complaint investments is one of the key factors attracting the participation of service providers, consumers and investors in Islamic finance. They also highlighted the importance of public awareness and education on Islamic finance to counter the still-existent misperception among consumers that only Muslims can subscribe to Islamic finance as one of the challenges that may be faced by the emerging markets in developing their Islamic finance industry. Other issues discussed included Sukuk issuance in emerging markets such as Kazakhstan, and how to take it to the next level in encouraging both corporate entities to be involved in issuing Sukuk, as well as governments for public infrastructure financing purposes. Mr Goy shared the country experiences of Luxembourg with regard to the development of Islamic finance from 1978 - when it's first Islamic financial institution was introduced - until its emergence as the third largest domicile for Shari`ah-complaint investment funds, worldwide.

The Secretary General of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Dr. Hamed Hassan Merah, delivered the Keynote Speech for the 12^th Summit Gala Dinner. In his speech, Dr. Merah illuminated parallels between the old Silk Road and modern Islamic finance, in that both are primarily being guided by the development of new products and search for new markets for continued expansion and require a culmination of unprecedented collective efforts by all the different markets. In the case of modern Islamic finance, global interaction of markets across different regions of the world is driving its growth and wider acceptability. Dr Merah also highlighted lessons from the old Silk Road experience especially in terms of economic relationships, societal developments and political will, which can benefit Islamic finance in a number of ways, such as: i) the importance to make sure that the products are of high quality, and are safe; ii) the significance of building an enabling environment for the dynamic growth of Islamic finance, while protecting its integrity; and iii) the indispensable necessity of global collaboration - towards building and enhancing mutual opportunities and gaining from mutual benefits.

The 12^th IFSB Summit was attended by key global Islamic financial services industry leaders, from among regulatory and supervisory authorities and financial institutions from 28 countries, representatives from international multilaterals such as the Islamic Development Bank Group, International Monetary Fund and the World Bank, as well as the local Kazakhstan financial community.

The Summit ended on 22 May 2015.

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About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players. The IFSB comprises members representing regulatory and supervisory authorities, international inter-governmental organisations and market players, professional firms and industry associations. For more information about the IFSB, please visit www.ifsb.org.

© Press Release 2015