Islamic Financial Services Board 1 – (IFSB) Summit began with opening speeches by Jaseem Ahmed, Secretary-General of the IFSB, HE Yves Mersch, Governor Banque centrale du Luxembourg and Summit host, HE Faris A. Sharaf, Governor Central Bank of Jordan as well as HE Dr. Sri Muliani Indrawati, Managing Director of The World Bank Group.
The 8th IFSB Summit themed “Enhancing Global Financial Stability: Challenges and Opportunities for Islamic Finance” is held in Luxembourg and hosted by the Banque centrale du Luxembourg.
Amidst the more challenging environment presented by the recent international financial crisis, the Summit noted that performance of the Islamic financial services industry has been remarkable in recent years.
This is reflected in the phenomenal growth of assets, albeit from a small base initially, reaching about fifteen percent per annum during the last decade.
The growth has been across all asset classes, including banking, Takāful, asset management and Sukūk. Islamic financial services have also expanded into new geographical areas. The strengthening of Islamic finance in the Middle East, its gathering momentum in emerging economies, and its emergence in Europe are all part of this transformation.
The global financial crisis has led to a recognition of the importance of moving towards a macroprudential framework that would help to maintain financial stability in order to minimise the impact on the real economy of disruptions to the financial sector.
This is different from the existing framework where central banks have a sole and clearly defined mandate – namely price stability – and a single instrument – the short term interest rate. However it is much harder to define and measure financial stability due to a number of reasons, including the lack of data.
For Islamic finance in particular, the pressing issue concerns the need to ensure that the regulatory and supervisory framework for Islamic finance is consistent with ongoing global regulatory and supervisory reforms.
This is particularly important since Islamic finance is rapidly being mainstreamed and increasingly integrated into global financial markets. In this connection, IFSB announced that it was preparing exposure drafts of two new standards on liquidity risk management.
These standards will complement Basel III liquidity standards by providing guidance on Basel III’s application to Islamic financial institutions.
Islamic finance was resilient during the global crisis, however vulnerabilities remain. While substantial progress has been made in developing regulatory and prudential standards many jurisdictions still have not adopted standards for Islamic financial institutions and find it difficult to conduct effective prudential oversight.
In addition, accounting and auditing standards for the industry are not applied evenly across jurisdictions, thereby limiting transparency and complicating the assessment of institutional risks. Further, the legal underpinnings of Islamic financial transactions are not yet robust.
The rapid growth of the Islamic finance industry has also exposed the global shortage of skilled and experienced professionals in the sector. There is also a scarcity of Shariah scholars with adequate knowledge of banking and finance. In addition, there has been relatively little research on the functioning of Islamic financial systems around the world.
It was noted that the IFSB members are working towards addressing challenges to the stability Islamic financial system. This highlighted the role of the Islamic Financial Stability Forum which provides a platform to promote collaboration among IFSB’s members in areas such as surveillance, sharing of experiences in crisis prevention, management and resolution and cooperation in capacity-building and in the development of emergency infrastructure and facilities.