Supervisory Implications Of Islamic Finance In The Current Regulatory

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• To address the fundamental question of how these issues can be addressed within the current regulatory environment.

The supervisory

implication of regulating

Islamic Finance

Regulation in a wholly Islamic jurisdiction.

Regulation of both Islamic and conventional finance.

Regulation of both Islamic and

conventional finance.

Whether a single regulator can regulate both conventional and Islamic Finance

Whether it is possible for a single integrated regulatory approach or regime to apply to both conventional and Islamic FinanceGreatest challenges faced

by regulators

• Aligning the international standards adopted across the global financial system with the fragmented standards and practices

• Islamic finance – face their own share of concerns

The Regulatory Position In Relation To Sharia’ah

The Regulatory Challenge: Addressing The Unique Risks In Islamic Finance

a. Shariah-compliant Risk Mitigation

The same risk mitigates are not always available to Islamic firms.

Limited availability of Shariah Compliant - resulting in identified but unaddressed risks.

b. Legal and Prudential Risks

Prudential risks may rise in murabahah where the customer is not bound to take possession of underlying assets.

Profit-sharing investment accounts (PSIA) pose prudential risks which have two unique risk which are :-

- Fiduciary risk

- Displaced commercial risk (DCR)

c. Product Definition

Regulators having difficulty on provide the most suitable regulatory framework sometimes.

The risks may manifest themselves at different stages of a transaction.

d. Shariah Non-Compliance Risks

Some regulators have to find solution trough the implementation of adequate systems and controls that ensure compliance with Shariah.

Every regulatory structure need to have adequate enforcement powers.

Role of regulator to play in respect of such issues in Islamic finance

It is not desirable of financial services regulator to opine on question of Shariah.

The AAIOFI has provided some direction on the approach to Islamic windows, primarily in relation to segregation of accounts, Shari'ah requirements and specific disclosure.

Windows operations

Challanges Find the most consistent regulatory framework for Islamic windows.

CritismIslamic window cannot truly be Shari'ah-compliant

Fundamental regulatory problem

Which segregation of the conventional and Islamic business can be achieved to ensure that the Islamic window is not operating in a manner that would violate Shari'ah

Is Integration of Regulatory Requirements for Islamic Finance and Conventional Finance

possible??

No. Why?? Yes. Why?? Regulatory which imposes the same

systems -may be seen as imposing conventional standards without due consideration for Islamic finance.

Modification is required in order to reflect the specificities of Islamic finance

It is possible to integrate both industries as long as a MODIFICATION is made to suit both financial sectors.

Conventional regulator equipped with adequate regulatory tools

To provide an integrated regulatory structure.

To apply across the industry and create a level regulatory platform.

The mission of the IFSB

To provide standards and guidelines.

Is not only encouraged at the international area but is desirable in the interest of fairness and competitiveness.

Working with IFSB & other agencies

To make the necessary adjustments to international standards in order to reflect the needs & risks of the Islamic financial service industry.

THANK YOU.