Islamic Finance World Bank – IMF – Federal Reserve System

Seminar for Senior Bank Supervisors from Emerging Economies Washington DC USA October 17-21, 2016

Zamir Iqbal, PhD. Lead Financial Sector Specialist The World Bank Global Islamic Finance Development Center Istanbul, Turkey [email protected]

Globalization of Islamic Finance…

Source: IFSB Financial Stability Report 2015, KFHR, IMF

Islamic Finance makes into G-20 agenda 2015- The G20 group of major nations has included discussion of Sukuk (Islamic bonds) as an infrastructure financing tool in its annual agenda, a move that could potentially spur the use of projectbased Sukuk. In addition, Islamic Finance is subject of study under G20 themes of long-term investments and Financial inclusion.

….there is increasing interest in Islamic finance from non-Muslim countries Recent transactions include sovereign issuance by United Kingdom (UK), South Africa, Hong Kong, and Luxemburg. UK  2010 – The Financial Services and Markets Act 2000 Order 2010 was introduced by Treasury to support Islamic finance and the issuance of corporate sukuk within the UK  2012 - The UK Government launched an Islamic Finance Task Force with the aim of securing London’s status as the Western hub for Islamic finance  2013 - London hosted the World Islamic Economic Forum during which the UK Prime Minister announced plans to issue a Sukuk in 2014 and to turn London into a global center of Islamic finance.

France  2009 - The amendment of Article 2011 of the French Civil Code relating to the formation of trusts was interpreted as an important step towards permitting the issuance of sukuk out of France  2010 - Revision of specific tax regulations covering Sukuk, ijarah, istisna and murabaha with a view to removing discrepancies Source: KFH Research

Luxembourg  2010 - The Luxembourg Tax Authority published a circular to clarify the tax treatment of murabahah and sukuk transactions, to ensure that they benefit from the same tax treatment as conventional products  2011 - Luxembourg’s CSSF published a note that clarified that no specific legislation was required for Shariah compliant investment funds, since Luxembourg’s current law contains no obstacles to it.

Germany  2012 - German banking regulator hosted an Islamic finance conference

in Frankfurt during which the tax treatment of different Islamic finance products was discussed.

Hong Kong  2014- Hong Kong has raised $1bn in its debut Islamic bond issue.

SouthAfrica  2014- $500m sale was more than four times subscribed, with an order book of $2.2bn according to the SA Treasury

Russia  2016- Opened first Islamic Bank, The Partnership Banking Center in March 2016.

World Bank Global Islamic Finance Development Center

World Bank Group President Jim Yong Kim today opened the Global Center for Islamic Finance, together with Turkish Deputy Prime Minister Ali Babacan.

Roadmap

I.

MARKET TRENDS

II.

HOW ISLAMIC BANKING WORKS?

III.

REGULATORY AND SUPERVISORY ENVIRONMENT

IV.

STATE OF DEVELOPMENT OF ISLAMIC FINANCE

I. Market Trends

Islamic Financial Assets Have Been Growing Rapidly Source: IFSB 2013, MIFC 2014, KFH Research, Standard & Poor’s

Source: Islamic Finance Development Report 2015, ICD-Thomson Reuters

Market Size – Islamic Banking

Source: Financial Stability Report 2016, IFSB

Composition and Domicile of Islamic Assets

Source: Financial Stability Report 2016, IFSB

Shares of Global Islamic Banking Assets

Source: Financial Stability Report 2016, IFSB

Islamic Banking Assets Growth Trend

Source: Financial Stability Report 2016, IFSB

Growth of Banking Assets

Source: World Islamic Banking Competitiveness Report 2016, Ernst&Young

Islamic Banking Average Annual Growth by Country 1H2015

Note: The growth rates in this chart for each country are calculated on data stated in local currency terms. There are some missing data points for Saudi Arabia and Turkey. Growth rates are non-annualised and captured for two quarters between end-2014 and 1H2015. Source: PSIFI, IFSB.

Sukuk Supply and Demand Worldwide

Thomson Reuters Barwa Sukuk Perceptions & Forecast 2016. “Industry at Crossroads”

Demand for sukuk has been surpassing the level of sukuk issuances worldwide.

Global Takaful (Islamic Insurance) Markets

Gross Contributions by Country Groups (2007–2014)

Source: IFSB (2016), Swiss Re (2015), Sigma-World Insurance Database; World Islamic Insurance Directory 2015

Gross Contributions by Country (2014)

Source: IFSB (2016), Swiss Re (2015), Sigma-World Insurance Database; World Islamic Insurance Directory 2015.

II. How Islamic Banking Works?

Core Components

Economic and Social Justice

Ethical and Responsible Finance

Risk Sharing Finance

Theoretical foundations of Islamic Financial System

Risk Sharing

Reduction of Information Asymmetry (Gharar) * Prohibits contracts with high uncertainty (Speculation/Gambling) * Requires Full Disclosure before, during and after the contract

Prohibition of Interest (Riba)

Eliminates Debt contracts and Leverage Materiality

Economic and Social Justice Wealth, Ownership and Property Rights Preservation of Property Rights, Protection of Property Rights of Stakeholders, Significance of Rights of the Society The role of Wealth, Money, and Capital, Sanctity of Contracts

How a banking system is designed without “interest or debt?” 

Prohibition of interest discourages debt and leverage



Risk sharing rather than risk-shifting –

Because interest is prohibited, pure debt security is eliminated from the system and therefore suppliers of funds become investors, rather than creditors. The provider of financial capital and the entrepreneur share business risks in return for shares of the profits and losses.



Close linkage with the Real Sector of the economy



Promotes Asset-backed Finance –



The system introduces a “materiality” aspect that links financing directly with the underlying asset so that the financing activity is linked to the real sector activity. There is strong linkage between the performance of the asset and the return on the capital used to finance it.

Similarities with ethical and Socially Responsible Investments (SRIs).

Commonality: Ethical Investing  Substantively: Islamic finance is “ethical finance and investing”.  Consider: Lutheran funds, Roman Catholic funds, “green” funds, university investment programs (WARF-UW; UC-Berkley).

 No investments in: – – – – – –

–

Production or distribution of alcohol for human consumption Production of tobacco for human consumption Gambling Prostitution and pornography Defense and weapons Pornography

Add constraint on interest-based debt => Islamic investment

Key Contracts – building blocks Contract

Function

Description

Amana

Custody

Trust. Placing something valuable in trust with someone for custody or safekeeping.

Bay’ al-Istisna Bay-mua’jjal

Order to build Deferred Payment

Bay’ al-Salam

Forward Contract

Ijarah

Leasing

Mudarabah

Trustee finance contract

Murabahah

A cost-plus-sale contract

Musharakah Qard-al-hassan Sukuk

Equity partnership. Benevolent Loan Islamic Bond

Takaful Wikala

Insurance Agency

Sale in order to manufacture or construct. Sale contract where the price of the product or underlying asset is agreed but the payment in lump sum or installments is deferred to a specified future date. Sale by immediate payment against future delivery. Similar to conventional forward contract but requires full payment at the time of contract. A sale contract that is not the sale of a tangible asset but rather a sale of the usufruct (the right to use the object) for a specified period of time. An economic agent with capital (rabbul-mal) can develop a partnership with another agent (mudarib) with skills to form a partnership with the agreement to share the profits. Although losses are borne by the capital owner only, the mudarib may however be liable for a loss in case of misconduct or negligence on his part. A cost-plus-sale contract where a financier purchases a product, that is, a commodity, raw material or supplied, for an entrepreneur who does not have its own capital to do so. The financier and the entrepreneur agree on a profit margin, often referred to as a mark-up which is added to the cost of the product. The payment is delayed for a specified period of time. Equity partnership. It is a hybrid of Shiraka (partnership) and Mudarabah combining the act of investment and management. Charitable loans with no interest and low expectations of return of principal. Plural of the Arabic word Sakk meaning certificate, reflects participation rights in the underlying assets. Insurance contract through mutual or joint guarantee. Representation. Entrusting a person or legal entity (Wakil) to act on one’s behalf or as one’s representative.

Islamic Financial Intermediation (Banking) Key Highlights Assets Trade Financing, Leases, Mudarabah financing

Partnerships (mudarabah and musharakah)

Liabilities

Depositors are investors rather than lenders



Risk Sharing through Profit and loss sharing.



Assets and Liabilities are matched.



Ethical and socially responsible assets

Demand Deposits

Investments by Depositors

Securities Investments Fees



Capital

A Stylized Balance Sheet of an Islamic Bank

Assets

Liabilities

Trade Financing (Salaam, Morabahah)

Demand Deposits (Amanah/ Waad)

Leasing / Rentals (Ijarah / Istisna) Profit/Loss Sharing Investments ( Mudarabah) Equity Investments ( Musharakah) Fee for Services

Investment Accounts (Mudarabah)

Special Investment Accounts (Mudarabah)

Capital Equity Reserves

III. Regulatory and Supervisory Framework

Laws regulating IFIs

Legal Framework for Islamic Financial Institutions (IFIs)

Specific Laws

Same laws of conventional banks

Supervision of IFIs

Some countries like Iran, Kuwait, Malaysia, Sudan, Turkey, UAE and Yemen have enacted specific laws to regulate the establishment of IFIs.

In other countries, IFIs are established by the same laws of conventional banks.

In all the countries in which they operate, IFIs are supervised by their respective supervisory and regulatory bodies.

Approaches to prudential regulations of IFIs

Specific rules

In some countries, the regulation and supervision of Islamic banks is carried out by rules specifically developed for IFIs.

Same rules for conventional banks

In other countries, IFIs are subject to the same prudential rules that govern their conventional counterparts.

Dual Approach

some specific prudential rules for IFIs (licensing, reserve requirements, reporting etc.) but in other matters same rules are being applied as for conventional banks.

Islamic Banking Regulation and Supervision

Source: Song, Inwon and Carel Oosthuizen 2014, “Islamic Banking Regulation and Supervision – Survey Results and Challenges,” IMF Working Paper No. 14/220 (Washington: International Monetary Fund).

Islamic Banking Regulation and Supervision

Source: Song, Inwon and Carel Oosthuizen 2014, “Islamic Banking Regulation and Supervision – Survey Results and Challenges,” IMF Working Paper No. 14/220 (Washington: International Monetary Fund).

Key Stakeholders Islamic Development Bank Group (IDB, ICD, IRTI, ICIEC, ITFC)

Islamic Financial Services Board (IFSB) Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) Multilaterals (The World Bank Group, IMF, Asian Development Bank)

International Islamic Financial Markets (IIFM)

International Islamic Rating Agency (IIRA)

International Center for Education in Islamic Finance (INCEIF)

Islamic Financial Services Board (IFSB) IFSB is an international standard-setting organization with a membership of 185 participants, whose work complements the work of the Basel Committee on Banking Supervision, International Organization of Securities Commissions and the International Association of Insurance Supervisors. As of early 2014, the IFSB has issued 17 Standards, 5 Guidance Notes and 1 Technical Note for the Islamic financial services industry.

Approved Standards

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Risk Management Capital Adequacy Corporate Governance Transparency and Market Discipline Supervisory Review Process Governance for Collective Investment Schemes Special Issues in Capital Adequacy Guiding Principles on Governance for Islamic Insurance (Takaful) Operations Conduct of Business for Institutions offering Islamic Financial Services Guiding Principles on Shariʿah Governance System Standard on Solvency Requirements for Takaful Undertakings Guiding Principles on Liquidity Risk Management Guiding Principles on Stress Testing Standard On Risk Management for Takaful Undertakings Revised Capital Adequacy Standard Revised Guidance on Key Elements In The Supervisory Review Process of Institutions Offering Islamic Financial Services 17. Core Principles for Islamic Finance Regulation (Banking Segment)

Islamic Financial Services Board (IFSB) Standards under Development 1.

Revised Guidance on Key Elements in the Supervisory Review Process of Institutions Offering Islamic Financial Services (excluding Islamic Insurance (Takaful) Institutions and Islamic Collective Investment Schemes)

Guidance Notes and Technical Note 1. Recognition of Ratings on Shariʿah-Compliant Financial Instruments

2. Guidance Note in Connection with the Risk Management and Capital Adequacy Standards: Commodity Murabahah Transactions 3. Guidance Note on the Practice of Smoothing the Profits Payout to Investment Account Holders 4. Guidance Note in Connection with the IFSB Capital Adequacy Standard: The Determination of Alpha in the Capital Adequacy Ratio 5. Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions (ECAIS) on Takaful and Re-Takaful Undertakings 6. Development of Islamic Money Markets (Technical Note)

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) The Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'ah standards for Islamic financial institutions and the industry.

Issued Standards Accounting Standards Auditing Standards Ethics Standards Governance Standards Shari’ah Standards

Guiding Notes Guidance Note on First time Adoption of AAOIFI Accounting Standards by an Islamic Financial Institution

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) ACCOUNTING STANDARDS Conceptual Framework FOR Financial Reporting by Islamic Financial Institutions FAS 1- General Presentation and Disclosure in the Financial Statements of Islamic Banks and Financial Institutions FAS 2- Murabaha and Murabaha to the Purchase Orderer FAS 3- Mudaraba Financing FAS 4 - Musharaka Financing FAS 5- Disclosure of Bases For Profit Allocation Between Owners’ Equity and Investment Account Holders FAS 6- Equity of Investment Account Holders and their Equivalent FAS 7- Salam and Parallel Salam FAS 8- Ijarah and Ijarah Muntahia Bittamleek FAS 9- Zakah FAS 10-Istisna'a and Parallel Istisna’a FAS 11- Provisions and Reserves FAS 12-General Presentation and Disclosure in the Financial Statements of Islamic Insurance Companies FAS 13- Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance Companies FAS 14- Investment Funds FAS 15- Provisions and Reserves in Islamic Insurance Companies FAS 16- Foreign Currency Transactions and Foreign Operations FAS 17- Investments FAS 18- Islamic Financial Services offered by Conventional Financial Institutions FAS 19- Contributions in Islamic Insurance Companies FAS 20- Deferred Payment Sale FAS 21- Disclosure on Transfer of Assets FAS 22- Segment Reporting FAS 23- Consolidation FAS 24- Investments in Associates FAS 25- Investment in Sukuk, Shares and Similar Instruments FAS 26 - Investments in Real Estate

AUDITING STANDARDS A S 1- Objective and Principles of Auditing A S 2- The Auditor’s Report A S 3- Terms of Audit Engagement A S 4- Testing for Compliance with Shari’a Rules and Principles by an External Auditor A S 5- The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements GOVERNANCE STANDARDS G S 1-Sharia Supervisory Board: Appointment, Composition, Report G S 2- Shari’a Review G S 3- Internal Shari’a Review G S 4- Audit & Governance Committee for Islamic Financial Institutions G S 5- Independence of Shari’a Supervisory Board G S 6- Statement on Governance Principles and Disclosure for Islamic Financial Institutions G S 7- Corporate Social Responsibility Conduct and Disclosure for Islamic Financial Institutions ETHICS Code of Ethics for Accountants of Islamic Financial Institutions Code of Ethics for the Employees of Islamic Financial Institutions

Regulation and Supervision of Islamic Banks o

Similar objectives as conventional banking   

o

Same objective to create a strong environment with enhancing risk management, internal control and audit, corporate governance and market discipline Current international standards and best practices like Basel Principles, accounting and corporate governance standards as benchmark However they are not always applicable.

Key differences:   

Legal framework to define the nature of Islamic banks and their specific operating rules Licensing Corporate governance  

Shariah compliant governance Shariah supervisory board

Regulation and Supervision of Islamic Banks o

Recognizing the Profit and Loss Sharing financing •

Risk management • •

• •

More focus on portfolio diversification, monitoring and control Technical expertise •

•

o

Investment and other risks Focus on operational risk

Bankers Examiners and experts in the regulators

Liquidity management •

• • • •

New Basel ratios Limited short-term liquid assets in Islamic banks Safety nets Separate deposit schemes and resolution framework Products (Sukuk)

Regulation and Supervision of Islamic Banks o

Capital requirements o

o

o

Alpha factor BCBS vs IFSB standards

Importance of disclosure o o o

Risk preferences Performance criteria (PER, IRR) More incentives for depositors to monitor the bank

Corporate and Shariah Governance 

Two boards: Board of Directors and Shariah Board



Shariah Governance System (Single or Multiple arrangements) –

Centralized vs. de-centralized Shariah-boards



Well defined criteria in appointing Sharia Board members (clear TOR, competence, fit and proper, confidentiality, etc)



Sharia compliance audits



Board and management oversight; transparency and disclosure

Malaysian Initiative: Islamic Financial Services Act (IFSA) 2013 Three key features I.

Clarity in the nature of demand deposits and investment accounts. o

II.

A clear focus on Shariah compliance and governance in the Islamic financial sector. o

III.

Provisions for differentiated regulatory requirements that reflect the nature of financial intermediation activities and their risks to the overall financial system.

Criminal prosecution of Shariah scholars for negligence or mis-conduct

Strengthened; o

o

Business conduct and consumer protection requirements Provisions for effective and early enforcement and supervisory intervention

Safety Nets Issues and Challenges o

Absence of guiding principles on Islamic deposit insurance o Operation and establishment of Islamic deposit insurance scheme o Collaboration & cooperation between Islamic Financial Service Board (IFSB) and InternationalAssociation Deposit Insurers (IADI) Committee

o

Limited avenue for investment on Islamic financial instruments o Demand exceed supply o Need for continuous innovation

o

Sufficiency and enforceability of the legal and regulatory framework for an Islamic deposit insurance system

o

Lack of Sharī`ah guidance to ensure Sharī`ah compliance

Safety Nets Issues and Challenges o

Permissibility of protecting Profit Sharing Investment Accounts (PSIA)

o

Lack of Sharī`ah-compliant investment tools

o

Insolvency law and policy for intervention and resolution

o

Liquidation of assets in event of bank failure o o o

Cross border liquidation of assets - globalization Priority of payments of new contracts applied to deposits (e.g. wakalah, musharakah contracts) Actual liquidation process (e.g. liquidation of assets funded by specific investment accounts)

Basel III implications on IFIs

Basel III implications on IFIs IFSB- Standards continue to be revised in light of Basel-III requirements 1.

Revised Capital Adequacy Standard (IFSB-15)

2.

Revised Guidance on Key Elements in the Supervisory Review Process (IFSB16)

3.

Guidance Note in Connection with the Risk Management and Capital Adequacy Standards: Commodity Murābahah Transactions (GN-2)

4.

Guidance Note in Connection with the IFSB Capital Adequacy Standard: The

Determination of Alpha in the Capital Adequacy Ratio (GN-4) 5.

Guidance Note On Quantitative Measures For Liquidity Risk Management In Institutions Offering Islamic Financial Services [Excluding Islamic Insurance

(Takāful) Institutions And Islamic Collective Investment Schemes (GN-6)

Basel III implications on IFIs The supervisory authorities` discretionary role is getting importance in the implementation of Basel III rules.

Challenges and Opportunities   







Impact of run-off rate for PSIA on liquidity requirement. Incentive to develop HQLAs to overcome liquidity issues. Impose of a discipline on utilization and maintenance of capital. (Capital optimization through the review o their internal processes and through the optimal capital structure) A potential slow-down in growth of the sector because of increased capital, liquidity and leverage requirements. The importance of discretionary role of national regulators in the implementation of Basel III rules, that recognizes industry limitations. An incentive to develop sharia-compliant insurance schemes, (that lowers run-off rates and deems deposits as stable) on a takaful basis.

Operational Risks and Costs  

 

Increased exposure to operational risks arising from compliance to Basel III. Increased need for state-of-the art risk systems, quantitative analysis, IT systems, and internal control systems and reliable credit rating systems. Increased operational costs of monitoring and reporting Robust framework for stress testing.

Core Principles for Islamic Finance Regulation

Basel Core Principles for Effective Banking Supervision o

A framework of minimum standards for sound supervisory practices and are considered universally applicable – –

o

Standard tools and guidance for regulatory and supervisory authorities Benchmark to assess the strength and effectiveness of regulation and supervision

Define 25 principles broadly categorized into seven groups: – – – – – – –

Objectives, independence, powers, transparency and cooperation; Licensing and structure; Prudential regulation and requirements; Methods of ongoing banking supervision; Accounting and disclosure; Corrective and remedial powers of supervisors; Consolidated and cross-border banking supervision

Core Principles for Islamic Finance Regulation

o

IFSB Core Principles Need for core principles for Islamic financial institutions o o

o

The nature of risks to which Islamic financial institutions are exposed; The financial infrastructure needed for effective regulation and supervision, which will result in additional or different regulation and supervisory practices to address the potential risks inherent in the operations of Islamic financial institutions

IFSB 17 - Core Principles for Islamic Finance Regulation (Banking Segment) o o

o

Established in April 2015, Effective on January 2016 Promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Sharī`ah principles, and recommending these for adoption. IFSB’s approach is to build on the standards adopted by BCBS – and to adapt or supplement them only to the extent necessary to deal with the specificities of Islamic finance

Core Principles for Islamic Finance Regulation

Main Differences from Basel Core Principles 

Licencing Criteria – –



Investment Account Holders – – – –





Full-fledged institutions Islamic Windows

Regulatory treatment Governance Capital Adequacy Risk Absorbency features

Shari’ah Governance Framework Capital Adequacy – – –

Investment Account Holders Displaced commercial risk Alpha factor

Core Principles for Islamic Finance Regulation BCBS Core Principles Supervisory powers, responsibilities and functions CP 1: Responsibilities, objectives and powers CP2: Independence, accountability, resourcing and legal protection for supervisors CP3: Cooperation and collaboration CP4: Permissible activities CP5: Licensing criteria CP6: Transfer of significant ownership CP7: Major acquisitions CP8: Supervisory approach CP9: Supervisory techniques and tools CP10: Supervisory reporting CP11: Corrective and sanctioning powers of supervisors CP12: Consolidated supervision CP13: Home-host relationships Prudential regulations and requirements CP14: Corporate governance CP15: Risk management process CP16: Capital adequacy CP17: Credit risk CP18: Problem assets, provisions and reserves CP19: Concentration risk and large exposure limits CP20: Transactions with related parties CP21: Country and transfer risks CP22: Market risks CP23: Interest rate risk in the banking book CP24: Liquidity risk CP25: Operational risk CP26: Internal control and audit CP27: Financial reporting and external audit CP28: Disclosure and transparency CP29: Abuse of financial services Additional Core Principles Treatment of PSIA/IAHs Sharī`ah governance framework Equity investment risk Rate of return risk [replacing CP23]

IFSB Approach Retained unamended: CPIFR 1 Retained unamended: CPIFR 2 Retained unamended: CPIFR 3 Amended: CPIFR 4 Retained unamended: CPIFR 5 Retained unamended: CPIFR 6 Amended: CPIFR 7 Retained unamended: CPIFR 8 Amended: CPIFR 9 Amended: CPIFR 10 Amended: CPIFR 11 Amended: CPIFR 12 Amended: CPIFR 13

Amended: CPIFR 15 Amended: CPIFR 17 Amended: CPIFR 18 Amended: CPIFR 19 Amended: CPIFR 20 Amended: CPIFR 21 Amended: CPIFR 22 Retained unamended: CPIFR 23 Amended: CPIFR 25 N/A But CP23 replaced with CPIFR 26 Amended: CPIFR 27 Amended: CPIFR 28 Amended: CPIFR 29 Retained unamended: CPIFR 30 Amended: CPIFR 31 Retained unamended: CPIFR 33 New: CPIFR 14 New: CPIFR 16 New: CPIFR 24 New: CPIFR 26

IV. State of Development of Islamic Finance

Islamic Finance Indicator Which Countries have the best developed Islamic Economy for Islamic Finance? TOP 10 ISLAMIC FINANCE 0

20

40

60

80

100

120

140

160

180

176

Malaysia

84

Bahrain

78

United Arab Emirates

66

Saudi Arabia Oman

51

Pakistan

51

Kuwait

43

Qatar

38

Indonesia Sudan Source: State of the Global Islamic Economy Report 2015/16, Thomson Reuters

200

35 33

* CRITERIA 1. Financial (Size of Islamic Finance Assets and Number of Islamic Finance Institutions)

2. Governance (e.g. Regulation for Islamic Finance and Disclosure Index Score) 3. Awareness (Number of Related News Articles, Islamic Finance Education Institutions, Research papers, and events) 4. Social (Value of Zakat and Charity and CSR Disclosure Index Score)

Adoption of IFSB Standards 

Number of Countries which adopted IFSB Standards

Source: Comparative Study on the Implementation of Selected IFSB Standards, IFSB Working Paper Series, WP-04/10/2015, October 2015

Adoption of AAOIFI Standards Mandatory regulatory requirement in jurisdictions

nal ds in

Shari’ah Standards

Accounting Standards

Shari’ah Standards

Bahrain

Bahrain

Indonesia

Accounting Standards onesia In

Oman

Jordan

Pakistan

Oman

Sudan

Qatar

Syria

Qatar Financial Centre

Islamic Development Bank

Sudan

Syria Islamic Development Bank Source: AAOIFI website

d Malaysia

Pakistan

In other jurisdictions including Brunei, Dubai International Financial Centre, France, Egypt, Jordan, Kuwait, Lebanon, Saudi Arabia, Qatar, Qatar Financial Centre, South Africa, United Arab Emirates and United Kingdom as well as in Africa, Central Asia and North America, AAOIFI Shari’ah standards and/or AAOIFI accounting standards have been used voluntarily as basis of internal guidelines by leading Islamic financial institutions. AAOIFI auditing, governance and ethics standards are not part of mandatory regulatory requirement for Islamic finance. Instead, these standards are used voluntarily by leading Islamic financial institutions across all major Islamic finance jurisdictions.

Islamic Finance Sub-Indicators

REGULATION SUB-INDICATORS TOP COUNTRIES Malaysia Pakistan Bahrain Nigeria Indonesia Iran Maldives Unidet Arab Emirates Qatar Sudan Brunei Darussalam Kazakhstan

Indicator Value 100 100 100 100 100 83 67 67 67 67 67 67

GOVERNANCE INDICATORS TOP 10 COUNTRIES 1- BAHRAIN 2- MALAYSIA 3- KUWAIT

93 90 67

4- PAKISTAN 5- OMAN 6- INDONESIA 7- SUDAN 8- UNITED ARAB EMIRATES 9- QATAR 10- MALDIVES

66 62 58 54 54

Source: Islamic Finance Development Report 2015, ICD-Thomson Reuters

52 48

SHARIA GOVERNANCE SUBINDICATORS TOP 10 COUNTRIES Indicator Value Bahrain 142 Malaysia 116 Kuwait 106 Bangladesh 92 Sudan 89 Oman 70 Indonesia 57 Pakistan 56 Lebonan 53 Egypt 48

Key Challenges 

Regulatory and supervisory framework is still evolving.



Standardization of contracts and practices



Corporate Governance and Corporate Social Responsibility



Liquidity and LOLR issues



Shallow money and capital markets



Limited risk and portfolio management instruments

Thank You

For your further questions please contact: Zamir Iqbal World Bank Global Islamic Finance Development Center T: +90 212 385 3443 E-mail: [email protected]

Disclaimers ©2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433/ Telephone: 202-473-1000/ Internet: www.worldbank.org E-mail: [email protected] All rights reserved. This work is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions

The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please contact the World Bank Treasury.