comparative analysis of islamic banking supervision and regulation...
Post on 30-Mar-2020
0 Views
Preview:
TRANSCRIPT
1
6/10/2012 1
Comparative Analysis of Islamic Banking Supervision and Regulation
DevelopmentMuhamed Zulkhibri
Islamic Development Bank
All findings, interpretations, and conclusions are solely of the authors’ opinion and do not necessarily represent the views of the Islamic Development Bank.
6/10/2012 2
Presentation outline
Inflation
Cost push inflation
Cost push inflation
Inflation
The Paper
Recent Development in Islamic Finance Industry
Review of Law and Legislation
Approach to Regulation and Supervision
Shari’ah Regulation and Governance
Conclusion
Recommendations
2
6/10/2012 3
The paper
Motivation:Rapid development but lack of coherent legal framework
Lack of uniformity in specific forms of Islamic principles
Difficult to generalize Islamic banking in practice
Objective:Review the legal and regulatory framework
Compare the legal and regulatory framework
Focus on 11 IDB member and 2 non-member countries
6/10/2012 4
6/10/2012 4
Recent Developments
3
6/10/2012 5
Rapid development in Islamic financial industry
Source: Bank Negara Malaysia, IFSB-IDB-IRTI, various
6/10/2012 6
Total assets of the industry has exceeded US$800 billion
Table 2. Islamic finance by country* (Banking, takaful, fund & other assets, US$bn)of which Number
2009 Banks Takaful Inv.firms Others of firmsIran 314.9 310.92 3.67 0.31 --- 22S.Arabia 138.2 136.01 2.2 --- 0.03 25Malaysia 102.6 96.69 3.8 --- 2.15 39UAE 85.6 84.18 1.4 0.03 0.01 22Kuwait 69.1 56.32 0.14 12.63 --- 37Bahrain 44.9 42.71 0.42 1.73 --- 34Qatar 34.7 32.4 0.4 1.87 0.01 18Turkey 22.6 22.56 --- --- --- 4UK 19.0 18.95 --- --- --- 22Bangladesh 9.4 9.17 0.15 0.05 --- 16Sudan 9.3 9.06 0.2 --- --- ---Egypt 7.2 7.21 0.01 --- --- 3Indonesia 7.2 6.84 0.38 --- --- 26Pakistan 6.2 6.2 --- --- --- 23Syria 5.5 5.53 --- --- --- 3Jordan 5.0 4.8 0.08 0.16 --- 10Brunei 3.3 3.31 --- --- --- 6Other countries 10.3 9.46 0.49 0.06 0.3 38Total 895.0 862.32 13.34 16.84 2.5 348*Includes only those firms submitting data to the Banker's surveySource: The Banker, 2010
4
6/10/2012 7
How do Islamic financial infrastructure keep-up with the development pace?
6/10/2012 Source: Khan , T (2009) 8
However, there are gaps remained in Islamic financial architecture developmentAreas of Standards Key Agency(s) in the International
Financial ArchitectureCorresponding Agency(s)
in Islamic Finance1. Accounting International Accounting Standards Board
(IASB), International Federation of Accountants (IFAC), Committee on Banking Supervision (BCBS)
AAOIFI
2. Anti-Money Laundering / Combating the Financing of Terrorism
Financial Action Task Force (FATF)
Auditing International Federation of Accountants (IFAC)
AAOIFI
3. Banking Committee IFSB4. Corporate Governance OECD, Basel Committee, World Bank AAOIFI and IFSB
5. Data Dissemination IMF6. Fiscal Transparency IMF
7. Insolvency and Creditor Rights Systems
World Bank, United Nations Commission on International Trade Law (UNCITRAL), International Bar Association (IBA)
Not yet addressed but especially critical for Islamic financing as it is based on risk sharing
8. Insurance Regulation International Association of Insurance Supervisors (IAIS)
Not yet addressed but within the mandate of IFSB
9. Monetary & Financial Transparency Policies
IMF
10. Payments Systems Committee on Payment and Settlements Systems (CPSS)
11. Securities Market Regulation International Organization of Securities Commissions (IOSCO)
Not yet addressed but within the mandate of IFSB
5
6/10/2012 9
Product development - slow pace of innovation
Great need to continue to innovate for further growth
Shortage of product in the area of risk and liquidity management
Sufficient (short- and medium-term maturities), but not for maturities at the extreme
Lack of national/international supporting commercial framework
Application of derivatives, hedging and securitization remained controversial
Figure 3. Sukuk Global Issuance (US$bil)
Sources: Zawya Sukuk Monitor, Islamic Financial Information Service, 2011
6/10/2012 10
Lack of comprehensive development
Cro
ss B
orde
r an
d G
loba
l D
evel
opm
ent
Nat
iona
l Dev
elop
men
t
Institutional Development
Legal, Regulation and
Shar’iah
Knowledge, Education and
Expert
Product and Market
Supporting key initiatives of legal and regulatory framework are key to robust development
6
A Review of Law and Legislation
6/10/2012 12
Islamic banking laws and structure varies across jurisdictions
Countries whose constitution requires the banking system to be fully Islamic:
Iran, Sudan, Pakistan (1985-2001)
Countries having specific enabling Islamic banking legislation:
Malaysia, Brunei, Indonesia
Countries that has no specific enabling legislation but have specific regulation and/or provisions under general financial market regulation for Islamic finance:
UAE, Saudi Arabia, Kuwait, Pakistan (since 2001), Jordan, Bahrain, Singapore, UK.
Islamic Window to Islamic Subsidiary
Badr, Emirates Islamic Bank, First Gulf Bank, RHB Islamic Bank, ABN AMRO, HSBC Amanah, AFFIN Islamic, Arab Banking Corporation
Conventional Banks to Islamic Banks
Bank Aljazira, Sharjah Islamic Bank, Dubai Bank, Kuwait International Bank, Bank Muamalat, Meezan Bank, Kauthar Bank
New Islamic Banks NOOR Islamic Bank, Albaraka Banking Group, Alinma Bank, Kuwait Finance House, The Bank of Khyber, Asian Finance Bank
ISLAMIC BANKING STRUCTURE
Pure Banking System
Dual Banking System
Parallel Banking System
Table 5. Overview of Type of Islamic Banking System and Banks
ISLAMIC BANKING SYSTEM
Specific Law
Using law as
conventional
banks
Law & Legislation
Specific Rules
Using rules as
conventional
banks
Prudential Framework
7
6/10/2012 13
Variation in law and regulationsMalaysia Iran Bahrain S. Arabia Pakistan Turkey Indonesia Sudan Kuwait UAE Jordan S’pore U.Kingdom
Type of Islamic Financial System
Dual Pure Parallel Parallel Pure Parallel Dual Pure Parallel Parallel Parallel Parallel Parallel
Specific enabling legislation for banking
Yes No No No No No No Yes No No No No No
Specific provisions for Islamic banking under general legislation
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No
Specific regulation for Islamic banking
Yes Yes Yes No Yes No Yes Yes Yes Yes Yes Yes Yes
Specific provision for Islamic banking under general regulation
Yes No Yes No No No Yes Yes No No Yes No No
Specific enabling legislation for capital market
No No No No No No No No No No No No No
Specific provisions for Islamic capital market under general legislation
Yes No No No No No Yes Yes No No Yes No No
Specific regulation for Islamic capital market
Yes No Yes No No No Yes Yes No No Yes No No
Specific provision for Islamic capital market under general regulation
Yes No No No Yes No Yes Yes No No Yes No No
General legislation and regulation applicability and enforceability
Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Shari’ah Authority in Central Bank or Financial Institutions
SAC/SC CoG NSB/SSC No SB/SA No SSB HSSB SSB HSA/SSA SB SA SA
Applicable Shari’ah Standards (Final Authority)
SAC CoG NSB No SB No NSB SB SSB NSB SB No No
Applicable Accounting Standards
National
AAOIFI#
National AAOIFI
AAOIFI IFRSIFRS
AAOIFI# National
National
AAOIFI# AAOIFI IFRS IFRS AAOIFI IFRS National
Tax Rules Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Regulatory and Supervision Authority
Bank Negara
Malaysia
Central Bank of
Iran
Bahrain Monetary Authority
S. Arabia Monetary Authority
State Bank of Pakistan
Central Bank of Turkey
Bank Indonesia
Bank of Sudan
Central Bank of Kuwait
DFIC, Central Bank of
UAE
Central Bank of Jordan
Monetary Authority Singapore
Financial Services Authority
Note: 1/ See Appendix 1 for details of the legislations and regulatory frameworks. SAC is stand for Shari’ah Advisory Council; SC is stand for Shari’ah Committee; HSA is standfor Higher Shariah Authority; SB is stand for Shari’ah Board; SA is stand for Shari’ah Advisor; SSC is stand for Shari’ah Supervisory Committee; SSA is stand for Supervision Shari’ah Authority; HSSB is stand for Higher Shari’ah Supervisory Board; CoG is stand for Council of Guardian; NA is stand for Not Applicable; AAOIFI stands for Accounting and Auditing Organisation for Islamic Financial Institutions; IFRS stands for International Financial Reporting Standards; # indicates authority has issued guidelines.
Rules/RegulationsIDB Member Countries Non-Member Countries
6/10/2012 14
Implications: Need to have a clear and specific legislative mandate
• Legal framework contain provisions relating to licensing and permissiblemodes of financing
• Clear provision for enterprise to call themselves Islamic banks, collect depositsand carry-out banking practices on the basis of Islamic principles
• Clear legislative power and enforceability to address compliance of Islamicprinciples i.e Civil court vs. Shari’ah court
• Resolve conflict between Islamic laws and common/civil laws
• A clear and specific point of reference with respect to different fatwas i.eShari’ah board
• Integrating ruling within the conventional banking framework andaccommodating Shari’ah reference in conventional legal documents
• Need to develop uniform prudential and best practices standards that aretailored to the specific characteristics
8
6/10/2012 15
Approach to Regulation and Supervision
6/10/2012 16
Islamic bank - different from conventional?
Significant deviation of the structure of assets
Choice and application of accounting policies
Practice and principles -the status of investment accounts (PSIA)
Governance rights granted to investment account holders.
Table 8. Two Windows Balance Sheet of Islamic Financial Institutions
Liabilities Assets
The mix of contracts on the liability side
A wider variety of assets andfinancing mixes. Products can beeither PLS based, or based on mark-up pricing
Demand deposit: Guaranteed but no return at all, the purpose is amanah (safekeeping)
Equity based PLS of Mudarabah and Musharakah , holding of equityof companies
Investment deposit (PSI account): Not guaranteed, no fixed return
Sales based assets throughMurabahah , Ijarah , Salam andIstis'na
Quasi-equity nature of investment deposit (account) due to PLS system
Murabahah trade financing
Shareholders’ equity Fee-based services
Reserves: Profit equalization reserves, investment risk reserves
Presence of risk sharing andabsence of interest
9
6/10/2012 17
Stylised facts about Islamic banking regulationSingle regulatory framework applies to both conventional and Islamic banks
Some follow the national and international accounting standards: IAS and AAOIFI
Some follow IFSB for prudential, regulatory and disclosure standards
Central banks are their main regulators and supervisors
Safety net arrangement implementing Islamic deposit insurance
Lack of cross border cooperation between different authorities
6/10/2012 18
Emergence of Islamic Deposit InsuranceTable 9. Islamic Deposit Insurance in the IDB Member Countries
Malaysia Iran Bahrain S. Arabia Pakistan Turkey Indonesia Sudan Kuwait UAE Jordan S’pore U.Kingdom
Year of establishment
2005 not available 1993 not available Implementing 2005 2005 1996 2008 2010 2000 2006 2001
Governance Structure
government-owned deposit
insurer with specific
legislation
implicit scheme
government-owned entity
without specific legislation
implicit scheme
not available
government-owned entity
without specific
legislation
government-owned entity
without specific
legislation
government-owned deposit
insurer with specific
legislation
central bank with specific
legislation
implicit scheme
government-owned entity with specific legislation
government-owned entity
without specific
legislation
privately-owned entity with specific legislation
Mandatory membership
not available not available not available not available not available × × ×
Separation of Islamic premiums from non-Islamic premiums
not available not available not available not available × × not available not available not available not available × ×
Management of fund according to Shariah principles
not available not available not available not available × × not available not available not available × ×
Similar coverage limit for Islamic and conventional deposits
not available × not available not available not available not available not available × ×
Similar premium rates for Islamic and conventional deposits
not available not available not available not available not available not available
Coverage limitMYR 60,000
(USD 17,150)not available
75% up to a maximum of BHD 15,000
(USD 39,800)
not available not availableTRY 50,000
(USD 30,000)
IDR 100 million (USD
10,000)
SDG 4,000 (USD 2,000)
for investment
and SDG 3,000 (USD 1,500) for current
100% not availableJOD 50,000
(USD 14,085)SGD 20,000
(USD 14,000)GBP 35000
(USD 56,000)
Source: Central bank websites, International Association of Deposit Insurers
FeaturesIDB Member Countries Non-Member Countries
10
6/10/2012 19
National regulatory framework and international best practices
National Regulation
6/10/2012 20
Shari’ah Regulation and Governance
11
6/10/2012 21
Stylised facts on Shari’ah regulation and governance
Exposed to “Shari’ah arbitrage” - seek to find the opinion that suits their objectives
Different institutions have different governance models to measure and monitor compliance
AAOIFI established a standard requiring Islamic financial services to have its own Shari’ah supervisory board
Shari’ah boards exist in all individual Islamic banks with some Shari’ah scholars sit on the SSBs of more than one financial institution
The backbone of Islamic finance and need for a standardized Shari’ah regulation and supervisory framework
6/10/2012 22
Regulating Shari’ah Governance
Independent central Shari’ah council commands public confidence and promote harmonisation and uniformity
of Shari’ah interpretations
Table 10. Regulation and Governance of Shari'ah Advisor/Board
CountryReference
TermComposition
Decision Making
Appointment/Dismissal
Fit/Proper Criteria
Higher Authority
Restriction on Sholars
Islamic Rating
External Shari'ah Audit
Malaysia × × ×Iran × × × ×Bahrain × × × × × ×S. Arabia × × × ×Pakistan × × Turkey × × × ×Indonesia × × × × ×Sudan × × × ×Kuwait × × × × ×UAE × × × × ×Jordan × × × × ×Singapore × × × × × × × × ×U.Kingdom × × × × × × × × ×Source: Adapted from Wafik Grais and Matteo Pellegrini (2006), official country websites and central bank annual reports
12
6/10/2012 23
Need for a structured Shari’ah compliance process
1) Inception &
Conceptualization
of Islamic Instrument
2) Structuring the Product according to
Shari’ah
3) Legal Documentation
4) Execution and
Implementation of Islamic Instrument
5) Audit and Review
6) Restructuring (if needed)
7) Recovery mechanisms & dispute resolution
Source: Adawiyah (2007)
External and internal audit
Drafting the compliance
manual
6/10/2012 24
Lessons Learned
13
6/10/2012 25
Lessons LearnedRapid development, small global share, diverse stages of maturity
Over-dependence on trade and commodity financing instruments
Reluctant to indulge in PLS instruments (PLS has been marginalised)
Gap between ideal model and practical implementation and gap between applicable law and Shari’ah principles
Policies and tools for regulation are based on conventional business models
Absence of standardisation of ununified Islamic governance model
Lack of Shari’ah consensus hampering innovation and creatingloopholes
Standardisation will not be achieved in near and absolute term
6/10/2012 26
Recommendations
14
6/10/2012 27
What is there for us?
Designing appropriate legal framework for Islamic financial institutions – conform to Shari’ah principles
Implementing the AAOFI, IFSB and Basel III legal and regulatory standards
Centralizing Shari’ah council/committee, supervisor and verdicts
Setting-up Shari’ah compliance audit framework and audit programme
Focus on cluster or regional harmonisation and graduallymoving towards greater harmonisation
6/10/2012 28
Further Questions
Future sustainability – New business model, bank bail-out?
Shari’ah-compliant or Shari’ah-based
Additional values – social/ethical/moral issues
Different economic outcome?
Discipline and governance
15
6/10/2012 29
Thank You
6/10/2012 30
Applicable law related to Islamic Finance Table 6. Applicable Laws and Legislations for Islamic Banking
Country
Malaysia Islamic Banking Act, 1983
Central Bank of Malaysia Act 2009Banking and Financial Institution, 1989 (S.32; S.124)Government Funding Act, 1983Development Financial Act, 2002 (S. 129)Takaful Act 1984
Iran Usury-Free Banking Operations Law, 1983Bahrain Central Bank of Bahrain, 2006
Central Bank of Bahrain, Rulebook, Manama, 2010: Section CA-3Decree No.64, 2006
S. Arabia Saudi Arabia Banking Law, 1966: Article 10.1Saudi Arabian Banking Law, 1966
Pakistan Banking and Financial Services Ordinance, 1984Banking Control Department Circular No. 13, 1984Modaraba Companies and Modarabas Ordinance, 1980Modaraba Companies and Modaraba Rules, 1981Banking and Financial Services Ordinance, 1984Banking Tribunals Ordinance, 1984Banking Companies Ordinance 1962 (S.32 (1), 2002)Presidential order to the local Council of Islamic Ideology, 1977
Turkey Decree No. 18112, dated 22/7/1983Decree No. 70 for the establishment of banksDecree No. 83/7506 dated 16/12/1983 for the establishment of Special Finance Houses in Turkey
Indonesia Banking Act No.21, 2008
Banking Act No. 23, 1999 (amended Act 3, 2004)
Banking Act No. 72, 1992Banking Act No. 7, 1992 (amended Act 10, 1998)
Laws and Legislations Country
Sudan Comprehensive Peace Agreement (CPA)
Banking Business Regulation Act, 1991Central Bank of Sudan Act 2002 (amended in 2006)
Kuwait Central Bank of Kuwait Law No. 32 1968: Section 10Central Bank of Kuwait Law No. 33 1968 (amended 2003)Central Bank of Kuwait Law, Article 86Central Bank of Kuwait Law, Article 93
UAE Dubai Islamic Finance Centre Islamic Finance Law Federal Law No.5, 1985Federal Law No.6, 1985Federal Law No. 10, 1980Dubai Law No. 9, 2004
Jordan Banking Law No. 28, 2000Singapore MAS Notice 640
MAS Notice 613MAS Notice 626MAS Notice 637MAS Notice 612Banking Act (S. 29)Banking Act (S.33)
U.Kingdom Financial Services and Markets Act 1999
Finance Acts 2007
Finance Acts 2006
Finance Acts 2005
Finance Acts 2003Source: Official country websites and central bank annual reports
Laws and Legislations
top related