IFSB, IADI eye Islamic deposit insurance systems

The joint effort aims to address a long standing problem confronting the Islamic finance sector

By HABHAJAN SINGH

Two international bodies are ramping up work to iron out the Islamic deposit insurance system, addressing a long standing problem confronting the Islamic finance sector.

The International Association of Deposit Insurers (IADI) and the Islamic Financial Services Board (IFSB) have signed a memorandum of understanding (MoU) to jointly develop and promote the technical standards for the implementation of an effective system for Islamic deposit insurance.

In the pipeline is the development of the prudential standards for Islamic deposit insurance systems, according to a joint statement from IADI and IFSB.

The MoU will see to the development of the IADI-IFSB Core Principles for Islamic Finance Regulation: Effective Islamic Deposit Insurance Systems (CPIFR-IDIS) which aims to provide guidance on the matter specifically to the members of both organisations, and the deposit insurance sector in general.

The Islamic deposit insurance system is an arrangement to protect insured depositors against the loss of their insured Islamic deposits placed with Islamic banking institutions (IBIs) in the event of the failure of an IBI, according to a paper presented at an earlier IFSB forum.

In 2011, when the paper was presented at the fourth Islamic Financial Stability Forum in Kuala Lumpur, it was noted that the concept of deposit insurance in the Islamic financial industry was relatively new with few countries having implemented it.

Lack of clarity on the insurability of profit-sharing investment accounts (PSIA), which form the bulk of total Islamic funds, also impeded its development, the paper then said.

The paper, titled “Implementation of an Islamic Deposit Insurance System for the Islamic Financial Services Industry” identified at least six issues that the industry players are grappling with as they attempt to develop and implement an Islamic deposit insurance system.

They included a lack of Shariah guidance to ensure Shariah compliance, permissibility of protecting PSIA, lack of Shariah-compliant investment tools, definition of PSIA, sufficiency and enforceability of the legal and regulatory framework for an Islamic deposit insurance system; and insolvency law and policy for intervention and resolution.

IADI-IFSB MoU

The recent IADI-IFSB MoU also intends to promote the implementation of prudential standards to facilitate the development of Islamic deposit insurance.

Here, the collaboration can include organising joint workshops and programmes, and providing expertise for joint technical assistance missions, it said in the statement.

In addition, they are looking at facilitating coordinated policy dialogues to regulatory and supervisory authorities in the member jurisdictions of the two organisations.

Another stated aim of the MoU is to increase awareness through knowledge-sharing and organisation of executive programmes, workshops and seminars.

The MoU signing ceremony took place during the inaugural joint working group (JWG) meeting of the CPIFR- IDIS on Aug 6, 2018, in Kuala Lumpur.

IFSB secretary general Dr Bello Lawal Danbatta and IADI secretary general David Walker represented their organisations at the MoU signing ceremony. Also present were Indonesia Deposit Insurance Corp chief specialist Dr Ronald Rulindo and Malaysia Deposit Insurance Corp (PIDM) CEO Rafiz Azuan Abdullah.

The JWG is guiding the development of CPIFR-IDIS, which aims to serve as an internationally recognised framework to facilitate the development and implementation of effective Shariah- compliant deposit insurance system (SCDIS).

The Islamic core principles will enable deposit insurance providers to identify gaps in their existing deposit insurance practices, while also setting an international standard-setting benchmark to facilitate independent (or third-party) assessment on the effectiveness of SCDIS. The joint standard will complement the revised core principles by IADI for the conventional deposit insurance system, upon which they will be based, it said in the statement.

In Malaysia, PIDM administers the deposit insurance system. Islamic and conventional deposits are eligible for a separate deposit insurance limit of RM250,000 per depositor per member bank, according to information at its website.

Deposits eligible for protection include savings and current accounts, fixed deposits, foreign currency deposits, principal-guaranteed conventional structured products, Islamic deposit accounts, as well as bank drafts, cheques, other payment instructions or instruments made against a deposit account.

As PIDM provides protection for both conventional and Islamic deposits, it said it maintains and administers two separate funds — the conventional deposit insurance fund and Islamic deposit insurance fund.