IMF adds IF to market surveillance. What’s next?

In this 1st of a 2-part series, Chattha looks at the issues from the regulatory perspective


The day of May 24, 2018, was a major breakthrough for Islamic finance (IF) industry, where the executive board of the International Monetary Fund (IMF) endorsed a proposal on the use of Islamic Financial Services Board (IFSB) Core Principles for Islamic Finance Regulation (CPIFR) and its methodology, as part of the standards used in assessing the banking regulatory and supervisory regimes of relevant member jurisdictions under the Financial Sector Assessment Programme and the Reports on Observance of Standards and Codes (ROSCs).

The IF industry — including the Malaysia-based IFSB which is celebrating its 15th annual anniversary — has welcomed this development, which points towards an international recognition of IF and the effectiveness of regulation and supervision of Islamic banking. To many, it just did not come as a surprise. There are concerted efforts of various stakeholders to bring this to reality.

Usually, the IMF has focused on conventional banking, but for the past 20 years, it has been collaborating closely with many regulators which are overseeing IF to provide technical advice, as needed. From stifling growth to financial instability and financial inclusion to deepening financial markets, the IMF has clear concern in doing so to encourage more consistency in applying IF rules and principles.

Therefore, reflecting the importance of IF, the IMF has played a catalyst and central role in the establishment of the IFSB in November 2002 to develop the necessary prudential standards. The IMF remains an associate member of IFSB. It was in February 2000, when a meeting of central banks on the side of a conference on the regulation of Islamic banks organised jointly by the IMF and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) called for international action to facilitate the development of relevant prudential standards.

It is important to note that the IMF formed an Interdepartmental Working Group with the objectives to develop an institutional view on the IF industry, and to build in-house expertise and better coordinate with different stakeholders. Moreover, the IMF established an External Advisory Group, comprising standard-setters for IF including IFSB, AAO- IFI, International Islamic Financial Market and leading international experts, to assist in identifying policy issues and to enhance coordination with different stakeholders interested in IF.

On Feb 3, 2017, the executive board of the IMF held its first formal discussion on Islamic banking, and adopted a set of proposals on the role that the IMF should play in this area. Following this discussion, on May 24, the IMF announced its formal position on IFSB CPIFR.

Core Principles

IFSB, which was established in 2002 with a mandate to develop prudential standards for the Islamic financial services industry, has issued so far 27 standards, guiding principles, as well as guidance and technical notes. It has 185 members including 75 regulatory and supervisory authorities, eight international inter-governmental organisations (including the IMF, Islamic Development Bank (IDB), Bank for International Settlements, Asian Development Bank (ADB) and the World Bank), and 102 market players operating in 57 jurisdictions.

The CPIFR is one of these 27 standards. The IFSB Council, in its 21st meeting held on Dec 12, 2012, at IDB headquarters in Jeddah, Saudi Arabia, approved the preparation of a set of IFSB CPIFR and the setting up of a Core Principles Working Group for this purpose. It is this working group, under the direction and guidance of the technical committee, which developed these core principles and associated assessment methodology.

Three years later, in April 2015, IFSB issued CPIFR, which included an assessment methodology that can assist all regulatory and supervisory authorities to carry out self-assessments of the progress made in the development of their regulatory frameworks and in achieving greater consistency in the implementation of

the IFSB standards. It is worth mentioning that other than 23 regulators, the IMF, World Bank, the Basel Committee, IDB and ADB were also members of this important working group.

The CPIFR is intended to provide a set of core principles for the regulation and supervision of the Islamic banking industry, and they are largely modelled after the Basel Core Principles for Effective Banking Supervision as revised in September 2012, with modifications to address Islamic banking-specific issues in regulation and supervision, in particular, with five additional principles that are specific to Islamic banking operations.

Next Step for Supervisors

While IF is recognised by the IMF, the important part now is how the IF industry makes use of this opportunity. This means reflecting on what is next for supervisors regulating Islamic banking.

Since the CPIFR standard and assessment methodology will be used by the IMF-World Bank in relevant assessments and the ROSCs will be initiated after Jan 1, 2019, in my view, there are four interlinked steps (picture) that can be implemented by supervisory authorities in dual ban- king systems where Islamic banking has a significant market share to pre- pare themselves for the assessment in future.

  • Dr Jamshaid Anwar Chattha is chief banking researcher and IF expert at the Central Bank of Kuwait. He is an ex-staff member of IFSB and also advises the IMF on Islamic banking supervision. The views expressed in this article are those of the author.