AS a contemporary movement, the global Islamic finance industry is merely 43 years old. After four decades it continues to grow and evolve in size and complexity, with assets under management estimated at US$3.6 trillion (RM14.32 trillion), and its economic and social impact increasingly evident in societal sectors including infrastructure, trade, industry, investment, savings, wealth management and philanthropy.
According to the International Monetary Fund (IMF), Islamic banking is now offered in over 60 countries and presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development and infrastructure by offering new modes of finance and attracting “unbanked” populations that hitherto have not participated in the financial system.
The IMF, especially under its current managing director, Christine Lagarde, has been a proactive supporter of Islamic banking and, together with the World Bank, has declared it a priority for its operations in countries with Islamic banking. The Fund has provided technical advice to countries on Islamic banking for over 20 years and is cooperating with standard setters and international organisations, especially the Islamic Development Bank, on efforts to develop supplementary standards for Islamic banking in areas that are not covered by existing international standards.
Last week, the IMF’s Executive Board took the international acceptability and mainstreaming of Islamic banking into the global financial system to its important next level by adopting the Core Principles for Islamic Finance Regulation and Supervision (CPIFR) introduced in April 2015 by the Kuala Lumpur-based Islamic Financial Services Board (IFSB) into the Fund’s financial sector assessment and surveillance architecture. Malaysia, especially then Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz played a crucial role in this process.
Come January next year, whenever an IMF staff team assesses the regulation of the financial sector of a member country, it will do so for both conventional and Islamic banking sectors. Initially this would be confined to member countries in which Islamic banking is of systemic importance, where it accounts for 15 per cent or more of the total banking system.
The logical progression would be for these assessments eventually to cover any country — both Muslim and non-Muslim — where Islamic finance products are offered. That would be a crucial test for the “globalisation” of Islamic finance.
For the ordinary Islamic bank customer, these assessments would give comfort, certainty and security in the knowledge that the regulation of their banking system is being independently assessed by the IMF, which does not hold back in articulating the regulatory gaps and shortcomings of any particular jurisdiction. This could contribute not only to the quality of regulation, but also to the market conduct of stakeholders, especially financial institutions.
In some respects, this ought to be as much a component of financial and governance inclusion, and could serve towards equalising the playing field between financial institutions and their stakeholders, thus reducing the propensity for poor oversight and institutional corruption.
The main IMF financial sector surveillance tool is the Financial Sector Action Plan (FSAP), established in 1999 and which is a comprehensive and in-depth analysis of a country’s financial sector and hitherto of its observance of the Basel Core Principles (BCP) for Effective Banking, Insurance and Capital Market Supervision.
The IFSB is rolling out similar core principles for the regulation of Takaful (Islamic insurance) and Islamic capital market. Core Principles for various financial sectors have become a standard tool to guide regulators and supervisors in developing their regulatory regimes and practices. All the above provide input to the oft controversial Article IV Consultation conducted annually on individual countries by IMF teams.
The regulation and supervision of the Malaysian financial sector is second to none, albeit subject to the usual caveats of extraneous and domestic factors, including the state of the global economy, commodity price and exchange rate volatility and any change of government, as Malaysia experienced last month. The IMF in is 2018 Article IV Consultation in March commended the quality of the regulation of the financial sector by BNM and the Securities Commission Malaysia.
But, rewind back five years to June 2013, and you will find that the FSAP on Malaysia acted as a “dry run” for the CPIFR policy adopted last week by the IMF. Despite the absence then of CPIFR, BNM governor Zeti confirmed to me then that she insisted that the assessment cover both conventional and Islamic banking, insurance and capital markets. That was the first FSAP undertaken by the IMF that covered both conventional and Islamic financial sectors — five and a half years ahead of its formal inclusion in January 2019.
That exercise may not have been as exhaustive to incorporate the specificities of Islamic finance, but the IMF concluded then: “The regulatory framework for Islamic banks encompasses standards which are applicable to commercial or investment banks and standards which are modified or distinct to cater for risks specific to Islamic banking business. Syariah requirements are observed in the formulation of these standards through active involvement of the Syariah unit and consultation with the Syariah Advisory Council on Islamic Finance. The supervisory approach and practices for Islamic banks at BNM are very similar to conventional commercial banks. The only major difference is that, in accordance with the risk-based supervisory framework, an additional operational risk, that of Syariah compliance, is assessed for Islamic banks.”
Whether the IMF adoption of CPIFR is a game-changer for the global Islamic finance industry is a moot point. The Fund is doing its part. It is now up to policymakers, regulators, market players and other stakeholders in Muslim countries especially to rise to the challenge and take the industry to the next level!