LONDON, 17 May 2006 — The Islamic Financial Services Board (IFSB) has dramatically expanded its membership from nine to 89 in just three years since it started operations in Kuala Lumpur in 2003. And according to IFSB Secretary General Prof. Rifaat Abdel Karim, the organization “is hoping to have 100 members by the end of this year.”
Members include the nine founding members including the Saudi Arabian Monetary Agency (SAMA); and supranationals such as the World Bank, the Bank for International Settlements (BIS) of the Basel Commitee, the Islamic Development Bank (IDB), the International Monetary Fund (IMF) and the Asian Development Bank. Even financial centers such as Qatar Financial Center, Hong Kong, the Labuan Offshore Financial Services Center and the Dubai International Financial Centre have joined as members.
The IFSB, whose mandate is to develop prudential and supervision standards for the global Islamic financial services industry, last December published its first two standards — one on capital adequacy and the other on risk management for dedicated Islamic financial institutions not offering insurance. “We are now working on standards for the supervisory review process and on market transparency and discipline,” stresses Rifaat. “We hope to issue draft exposures on these two standards by the end of this year. In January, we also issued a draft exposure on corporate governance, incorporating the specific characteristics of Islamic finance and also the interest of the investment account holder and Shariah compliance. It should also be finalized at the end of the year.” He also revealed that the IFSB is due to start work on a separate standard for capital adequacy for Islamic insurance (Takaful companies).
“We bring the expertise of Islamic finance, and they (the international organizations) want to have a better understanding of the issues involved. This is how we create awareness of the issues the Islamic banks are faced with. One of the flexibilities of the IFSB is that regardless of government or country, any organization or institution can become a full member as long as they offer Islamic finance,” explains Rifaat.
A good indicator of the growing importance and international acceptance of the IFSB is the fact that Singapore has upgraded its membership from observer status to full member. Singapore in February this year published a legal and policy framework for regulating long-term Islamic finance. It introduced amendments in the law making a level playing field for Murabaha, leasing and Sukuk transactions as equivalent conventional products. Singapore is keen to develop into an Islamic financial hub especially for capital market products.
In fact, the Singapore exchange is imminently one of the first exchange traded fund (ETF) products off the FTSE SGX Asia 100 Shariah, launched in January. The Shariah stock screening and filters was developed by Yasaar Research, a subsidiary of Yasaar Limited, one of the first breed of independent Shariah compliance companies serving the Islamic finance sector.
Rifaat sees China’s membership as vital, because China is potentially a huge market for Islamic finance. “If Islamic finance is to make inroads in China,” he adds, “the regulatory authorities there have realized that it is wise that they get things right from the beginning. Apart from its 80m Muslim population, the demography of Gulf exports, especially oil and petrochemicals, is increasingly geared towards China and East Asia.”
The huge liquidity in the Gulf as a result of the high oil prices, of which a sizeable proportion is in Islamic finance, also offers excellent investment opportunities in China.
Rifaat acknowledges that both the IFSB and the Islamic finance sector have many challenges ahead. The Muslim countries need to beef up their financial systems with a good regulatory framework and high quality supervisory standards. This would provide the safety net and promote financial soundness and stability, especially as the Islamic banking sector is experiencing phenomenal growth globally. “We just don’t go around re-inventing the wheel. On one hand, we want to create a level playing field for regulators. On the other hand, we also want to start building bridges so that we can integrate Islamic finance into the global financial system,” says Rifaat.
Following amendments to its constitution in December 2005, the role of the IFSB has also expanded to include standards for the capital markets such as equities and securities; and for insurance. Securities and insurance regulators and players can now become members of the IFSB in their own right. This is why the IFSB is the financial services board and not the banking board, stresses Rifaat. In effect, the IFSB is now becoming not only the equivalent of the Basel Committee but also that of IOSCO (International Organization of Securities Commission Organizations) IAIS (International Association of Insurance Supervisors).