The member countries of the Islamic Development Bank (IDB) are poised to establish a Financial Stability Forum to promote global financial stability in the Islamic financial system. This will be a strong recommendation amongst others in a report that will be submitted to the Islamic Financial Services Board (IFSB) Council in November 2009.
The report has been prepared by the Taskforce on Islamic Finance and Global Financial Stability that was established in 2008 by the IDB in collaboration with the IFSB, industry leaders and international experts.
The Taskforce had the brief to recommend ways of further strengthening the Islamic financial infrastructure to boost its resilience and ability to meet future challenges.
The Islamic Financial Stability Forum will mirror the activities of the Financial Stability Board set up by the International Monetary Fund (IMF) at the behest of the G20 Summit. The Financial Stability Board framework to strengthen the international regulatory standards is important because it will form the basis by which assessments will be made by multilateral agencies such as the IMF.
Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, speaking at a side seminar at the World Bank Group Annual Meetings held in Istanbul in Turkey last week on ‘Islamic Finance: During and After the Global Financial Crisis,’ which was jointly organized by the World Bank, the Islamic Financial Services Board (IFSB), the Islamic Development Bank (IDB) and the Institute of International Finance (IIF), called on the Financial Stability Board of the IMF to engage with the prudential standard setting entities for Islamic finance, not only to raise awareness of whether the new standards being introduced can be applied to Islamic finance and whether modifications need to be made. “Equally important is for there to be recognition of the standards that have been issued for Islamic finance specifically by the Islamic Financial Services Board. As a growing component of the international financial system, it becomes important for the interface and engagement with the international standard setting entities to take place given the common interest of global financial stability,” she explained.
The governor also confirmed that “substantive progress has been achieved by the Taskforce on recommendations on the effective implementation and enforcement of the prudential standards, the supervisory framework, the strengthening of the financial safety net mechanisms and the development of an effective crisis management and resolution framework for the global Islamic finance industry.”
The IDB and IFSB in addition also set up a Liquidity Management Task Force earlier this year whose mandate is to enhance the efficiency of Islamic financial institutions in managing liquidity at both national and across borders. This work is being further supplemented by ongoing market initiatives by the Bahrain-based International Islamic Financial Market (IIFM).
More recently, Malaysia established the Bursa Suq Al-Sila platform under the concept of commodity Murabahah. This multicurrency and multicommodity facility is an electronic exchange traded platform to facilitate the trading and settlement of commodity using crude palm oil (CPO) for liquidity management between Islamic financial centers. Although Malaysia already has a well functioning Islamic inter-bank money market, this platform provides a further alternative for liquidity management, through which global interlinkages in the international Islamic financial system can also be further enhanced. The first international trade on the platform was executed in London in September 2009 by Gatehouse Bank and CIMB Islamic Bank.
The growing role and relevance of Islamic finance in the global financial system will not only increase its potential to contribute to global financial stability but also toward strengthening global economic growth. As the world seeks solutions to the current global financial crisis, a general consensus is emerging that financial services needs to return to its basic functions — to provide financial services that adds value to the real economy. This, emphasized Zeti to delegates attending the side seminar, in fact represents the very essence of Islamic finance.
“These are the very elements that are espoused in the Shariah principles that underpin Islamic finance and which explains its resilience during this international financial crisis. The challenge before us is to build a new financial architecture that would allow for the more efficient functioning of not only financial intermediation within national economies but also across borders. Islamic finance, with its emphasis on a strong linkage to productive economic activity, its inbuilt check and balances and its high level of disclosure and transparency offers this prospect. Indeed, inherent in Islamic finance is the explicit elements that address several of the issues that have surfaced in the conventional financial system during the current crisis,” stressed Zeti.
