IFSB Role in Preventing Financial Crises and Islamic Ethics Perspective

 Islamic Financial Services Board (IFSB) acts as the international regulatory and supervision framework for Islamic financial services institution. Though Islamic financial industries keep growing in promising pace, they still experience some criticisms; one of them is an underestimate claim regarding Islamic finance soundness and safety which notoriously promoted to be better than the non-Islamic is lack of evidence. This claim, however, serves as the early warning to the trajectory of Islamic finance development and global vision which seems to employ. Thus, this study addresses this challenge by analyzing IFSB’s published frameworks based on the Islamic ethics. This is a descriptive inquiry which employed library-study approach. The result of this study suggests that IFSB should be more focus on human adversaries since moral hazard, either done collectively or individually, plays determining role in some systemic financial crises in the last two decades. The suggested action plan is discussed in the conclusion section

Does Dual Banking System in Indonesia Differentiate Investment Account Requirement?

Abstract. This paper aims to propose a model of investment account based on Islamic Financial Services Board guiding principles. The research figures out some factors affecting the process of deploying investment account, the proposed model, cost - benefit analysis as well as the steps to be taken by Islamic banking stakeholders to install the model in the future. Having reviewed many litetatures related to irregular deposit, investment account as well as the institutional theory, the study found that the adoption of investment account heavily relies on the political factor applied by Bank Indonesia. Law No. 21 Year 2008 that regulates Indonesian Islamic Banking clause 35 stated that Bank Indonesia has coercive power to drive the accounting and governance standard for the Indonesian Islamic banking. Other actors such as Financial Services Authority, National Sharia Board, and Indonesia Deposit Insurance Corporation also do affect the regulation on Investment Account. This paper informs the policy makers to set different regulation on investment account within the practice of dual banking system.</p

Basel III: Implications of Capital and Liquidity Regulations on Financial Stability during Economic Depression.

The dynamic global financial system has made it necessary to implement adequate regulatory measures that can effectively guarantee financial stability at the national and international levels. This thesis consists of three self-contained analytical chapters that focus on the effectiveness of evolving financial regulations in addressing systemic risk within the financial system. Despite numerous regulatory reforms introduced following the 2008 GFC, they are still concerns over the role of these regulations in mitigating complex issues related to systemic risk. The first study focuses on international and national regulatory frameworks in the context of conventional, hybrid, and Islamic banking. It analyses the guidance provided by the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) and examines the differences in the treatment of credit, liquidity, and systemic risk across four countries. The IFSB converts BCBS guidance to ensure compliance with Sharia principles for Islamic banks. Further insights show variations in liquidity and capital requirements imposed on banks in different countries, highlighting the need for countryspecific regulations to address the unique risks. The second study uses data from emerging market economies to investigate the relationship between capital and liquidity regulations under Basel III and their impact on default risk and systemic risk. The study addresses whether the new liquidity and capital requirements, such as the net stable funding ratio and higher capital adequacy ratio, contribute to alleviating the default risk and systemic risk in emerging market economies. The third study focuses on the relationship between credit and liquidity risks and their impact on bank default risk. It also addresses the effect of bank liquidity creation on systemic risk across different types of banks. The findings suggest that while credit and liquidity risks are positively related, no significant relationship exists. The impact of credit and liquidity risks on bank default risk is significant for conventional and hybrid banks, while bank size and capital adequacy ratio play a greater role in the stability of Islamic banks. The joint interaction between credit and liquidity risk negatively influences banking stability. The key findings demonstrate that Basel III's liquidity requirements, such as the Net Stable Funding Ratio (NSFR), play an important role in forecasting banks' default probability and mitigating systemic risk. The insights gathered emphasise the importance of incorporating new mitigating measures, including NSFR, leveraging requirements, countercyclical buffers, and globally systemically important institution surcharges to promote financial stability. Additionally, it demonstrates the relevance of liquidity creation in determining bank stability and its implications for systemic risk. This study offers substantial contributions to the growing body of literature by highlighting the differences in regulatory frameworks, the importance of this approach in developing bank risk profiles, and how they are adequately addressed. The study also contributes to understanding how financial stability can be enhanced while reducing systemic liquidity risk. The study shows that banks, regulators, and policymakers must collaborate adequately across all levels to align risk management and improve regulations and guidelines. This includes sharing information and fostering coordination at the international level

Risk and regulation of Islamic banks : the Indonesian experience

This thesis focuses on Islamic banking in Indonesia. It considers the related challenges of sharia compliance by Islamic banks and their regulation and supervision in Indonesia’s dual banking system. Crucial to the prudent regulation and supervision of banking is the control and monitoring of risks that could jeopardise a nation’s financial stability. Since compliance with sharia principles is the raison d’etre of Islamic banks, all their instruments and activities must be based on Islamic law. Unfortunately, sharia compliance gives rise to unique risks for Islamic banks not faced by conventional banks in Indonesia’s dual banking system. These include inconsistencies between fatwas, unique reputational risks which can cascade into liquid risks, and inefficiencies in the manifold regulatory framework governing Islamic banks. This thesis analyses the tension between classical Islamic principles required of bank contracts and the modern needs of businesses and the community. It also critically examines the less studied issue of developing an Islamic banking regulatory and supervisory framework that considers the risk pressures faced by Islamic banks operating in a financial sector dominated by conventional banking. This thesis argues that a middle way is possible for contemporary Islamic banks, which encourages prudent risk management whilst adhering to the evolving pluralistic form of Islamic law in Indonesia. The thesis critically assesses the extent to which global financial standards of the Basel Accords have been followed by Islamic banks in Indonesia with respect to their regulation, supervision, and risk management, in order to highlight the unresolved tensions in the multiple regulatory and supervisory institutions, viz. the state’s Financial Service Authority and the private agency of Sharia Supervisory Boards operating under the auspices of the National Sharia Board of the Majelis Ulama Indonesia. In this regard, one of the major challenges for Islamic banks is the potentially difficult institutional and Islamic legal reforms required to fully apply the international standards set down in the Basel Accords. Again, this thesis proposes a middle ground approach that accommodates modification of the existing financial regulatory and supervisory system in line with international best practice to provide more comprehensive guidelines for prudential regulation transparency

Shariah: An efficiency analysis

The oil shock of 1973 brought newfound wealth to a group of ultraconservative Muslims. This wealth coincided with the growing demand for shariah compliant products. The prohibition against interest is not new but has been around for millennia. This dissertation attempted to ascertain if Shariah compliance came at a cost to investors and if it was possible to be both just and efficient. We illustrate using Stiglitz and Cheung's sharecropping models that a profit and loss sharing contract can be as efficient as its alternatives (or more so), so there is no implicit tax on lenders who prefer a share of profit rather than a fixed return on a loan. The growth in Islamic finance has improved consumer awareness not only amongst Islamic investors, but also among ethical investors. Investors are now offered a chance to gain returns, without having to sacrifice their beliefs. Islamic finance may suffer from learning effects, portfolio managers certainly ‘learn by doing'. But once they have learned it seems that their portfolios need not underperform the market. However, it must be recognized that a lack of standardization and diverse scholar opinions can adversely affect the growth of the industry

Mapping the Risks and Risk Management Practices in Islamic Banking

Although risk management in Islamic banking is one of the major as well as controversial issues of the sector, it is still an under-researched area of study. A lot of uncertainties still exist in risk management in Islamic banking, for which the answers are not yet necessarily clear, but which will play a part in shaping the industry’s future. Effective risk management in Islamic banking, thus, deserves priority attention: unless the industry develops its own genuine risk management architecture, it cannot achieve the dynamism that provides the viability needed for a more resilient financial system than the failing Wall Street model. Therefore, the study of risk management issues of the Islamic banking industry is an important but complex area. This study, hence, explores and analyses risk management practices in the Islamic banking industry through the perceptions of participants who were drawn from the banking and finance industry. The research maps out the opinions and attitudes towards risk and locates the practices of the industry related to risk management. This study provides an up-to-date overview of current market practices, issues, and trends in risk management for Islamic banks. It focuses on practical applications and discusses a wide range of unique risks facing Islamic banks from the perspective of different range of practitioners. To fulfil the aims of the research study, first, the present thesis analyses a number of issues concerning the subject using secondary data. Second, the unique risks facing Islamic banks and the perceptions of banking professionals regarding these risks are surveyed through a questionnaire. The final survey sample comprised 72 surveys from 18 countries. The data were analysed using various statistical analysis techniques ranging from simple frequency distribution analysis to the more advanced analyses such as non-parametric statistical analysis, factor analysis, and MANOVA multivariate analysis of variance. Third, semi-structured interviews were subsequently conducted with 33 leading Islamic banking professionals from 9 countries in order to develop an in-depth understanding of the underlying issues. Focused coding technique is used to analyse and sort the findings. In general, the findings from this study identified weaknesses and vulnerabilities among Islamic banks in the area of risk management and governance. Risk management, monitoring, reporting, and mitigation need to be enhanced across the entire industry. The study has also shown that the majority of respondents consider liquidity, asset-liability management, and concentration risks as the top risks facing Islamic banks. In addition, regional risk perceptions were crystallized by conducting inferential statistical analysis. The findings also show that, although Islamic banks have shown resilience, they are not immune to financial shocks. The study asserts that the root drivers of the prevailing financial system have to be challenged and replaced by a more transparent and ethical alternative, for which Islamic finance is a serious yet underdeveloped option. The real issue in Islamic banking is the excessive reliance on form at the expense of substance. It should also be noted that the findings of the study have policy-making implications which could benefit regulators, policy makers, Shari’ah scholars, practitioners, academia, and institutional stakeholders. Furthermore, this study has filled a gap in the literature by empirically exploring risk management issues from an Islamic banking perspective

A FRAMEWORK FOR CORPORATE SOCIAL RESPONSIBILITY IN ISLAMIC FINANCIAL INSTITUTIONS: THEORY AND EVIDENCE FROM GCC REGION

The present research addresses the need for the development of a framework for implementing the Islamic CSR of IFIs that exist in conventional economies (i.e. mainly capitalism). The literature review reveals that CSR has never existed in any economic system other than capitalism, and that in spite of the fact that CSR has been based on various theoretical groundings, the ontological worldview of capitalism (mainly economic selfish man) and the epistemological considerations (mainly value-free scientific economic laws used in the production of knowledge) have influenced the understanding of CSR. Thus, the CSR literature fails to address mismatches between the micro objectives of businesses and the macro objectives of society. Such mismatches are, however, taken into account in the Islamic theory of maqasid al-Sharia (Sharia objectives) and the Sharia jurisprudence method which facilitate the production of Sharia rulings through which a balance between micro and macro objectives is achieved. Thus, the present research aims to develop a framework for implementing Islamic CSR (ICSR) for IFIs, based on a built-in compliance with Sharia objectives and where Sharia objectives are achieved through the managerial implementation of Sharia jurisprudence. Four theoretical gaps in the literature on ICSR have been identified: (1) justification of the usage of the frameworks and models of conventional CSR on the basis of the Islamic worldview and epistemology, which are fundamentally different from those of capitalism; (2) the specification of methodologies appropriate to the Islamic worldview and epistemology; (3) the design of a framework for implementing Islamic CSR; and, (4) the design of a framework for measuring Islamic CSR. It is found that creating an innate ICSR framework is not an end in itself, but instead aims to achieve Sharia objectives that represent the socio-political economic objectives of society and businesses, and thus international CSR frameworks are used after adjusting them to the Islamic worldview and epistemology. Furthermore, the PDCA (plan, do, check act) cycle is deployed to implement the Sharia jurisprudence method underlying a managerial framework of implementing and measuring ICSR. The ability of the developed ICSR framework to describe reality has been empirically proven by testing nine null hypotheses against data collected from Sharia employees in IFIs in the Gulf Cooperation Council (GCC) region. Moreover, several statistical patterns are identified regarding the survey respondents’ levels of knowledge of maqasid al-Sharia and conventional CSR, and the influence of organisational and individual differences on both levels of knowledge and the implementation of ICSR

Islamic Finance and Charity in The Muslim World. The Role of The Islamic Development Bank in Financing Aid

The purpose of this paper is to describe the role of Islamic finance in the charitable sector by analysing how Islamic banks and States manage funds for humanitarian and development aid. The Islamic Development Bank (IsDB) represents one of the main Islamic actors involved in the development cooperation and humanitarian relief and, in partnership with other donors, it  implements programs in its member countries. This research examines the existing literature and data regarding projects financed by the IsDB with the aim to understand the impact of Islamic financial tools on aid. The Lives and Livelihoods Fund (LLF) is an example of a program for poverty alleviation but also a mechanism of blended finance for supporting health, agriculture, and infrastructure projects. Financed by the IsDB, bilateral institutions, and foundations,it uses an innovative financing model aiming to produce sustainable growth in the most vulnerable member countries. It could represent a positive model for financing and implementing aid in a joint effort of Muslim and non-Muslim donors

TAKAFUL PRODUCTS AND SERVICES IN SAUDI ARABIA: AN EXPLORATION INTO POLICYHOLDER’S PERCEPTIONS AND REGULATORY FRAMEWORK

Takaful is the Islamic counterpart of conventional insurance, where it relies on a combination of tabarru (donation) and agency or profit-sharing. The takaful fund is considered a musharaka (partnership) among participants (policyholders). The relationship between the takaful operator and participants’ fund is based on either wakala contracts to manage the underwriting activities, and/or a mudaraba contracts to manage the underwriting or investment activities. Participants (Policyholders) in the takaful scheme are the main stakeholders; their equity consists of ownership of the underwriting activities and the investment funds. Participants’ relationship with Takaful Operators (TOs) depends on the percentage of the contributions premium they pay. They have a claim on assets of these funds in case of liquidation and they are entitled to have their claim paid if there is enough underwriting funds to finance payout; they are also entitled to share in the distribution of any investment and underwriting surplus. However, the only right that participants can exert on the takaful scheme is to disconnect their contractual relationship with the company in case of dissatisfactions. Participants’ undeserved rights might be due to management prioritizing interest towards shareholders as they are the main stewards of the takaful company. In other words, one of the main challenges faced in the takaful industry is shareholders and management discretions, power and activities due to the unclear structure of the takaful operational scheme. The Takaful operational scheme should follow the two-tier hybrid structure (mutual and proprietorship) as it has been identified by the prominent regulatory bodies such as AAOIFI and IFSB. However, almost all regulators, of which the Saud Arabian Monetary Agency (SAMA) is one, treat the TOs as a proprietorship, as it can be easily regulated and supervised which requires an identified share capital and shareholders. The main aim of this study, hence, is to recommend proper protection channels for participants, by conducting two parallel ways research, (i) exploring participants’ perceptions, knowledge, preferences and satisfactions levels about the service and products presented by the TOs in Saudi Arabia (ii) reviewing and comparing the current directives and laws imposed by the Saudi insurance regulatory authorities with the standards and polices imposed by the international insurance and takaful bodies. In fulfilling the aim of the study, primary data collection research was adopted through a survey questionnaire technique. The questionnaire was structured with 4 main dimensions (Disclosure, Knowledge, Preference and Satisfaction) with a total of 26 variables to cover the research objectives and themes. The survey questionnaire was distributed to 9 TOs in Jeddah, Saudi Arabia. A total of 300 out of 500 returned questionnaires were complete and found fit for analysis purposes. The data were analysed using various statistical analysis techniques ranging from simple frequency distribution analysis to the more advanced analyses such as non-parametric statistical analysis, Spearman’s correlation and multinomial logistic regression. In general, the results of the study show that participants’ overall perceptions and knowledge on TOs services and products is low, while participants reported high overall preferences which implies that participants are demanding more services from the TOs as they have more wants and needs. In term of satisfaction levels, participants reported a weak to moderate satisfaction levels, as a result of participants’ low perception, weak knowledge and high preferences which was obvious from the significant relationship between participants perceptions, knowledge and preferences as independent variables with participants’ satisfaction levels as dependant variables. In other words, in order for the TOs to satisfy their participants, they need to disclose more detailed information about different sorts of financial returns (investment return and underwriting surplus), as participants are financially motivated and there is no effect at all for religious motivation. The results of reviewing and comparing SAMA with the international insurance and takaful bodies, indicated that SAMA did not implement directive laws that address the takaful business nor any directive that address Shari’ah issues. Accordingly, it is highly recommended that SAMA adopts the well-established Corporate Governance and Market Conduct & Disclosure standards and polices that have been set by the international bodies such as AAOIFI and IFSB for better protection for the takaful participants in Saudi Arabia. The results of the research have established effective instrumental tools to measure the desired environment that should be available for the perspective policyholders and participants for their ultimate protection. These tools are based on participants’ perceptions, knowledge, preferences and satisfaction levels and based on the country’s regulatory assessments to support and protect participants’ and policyholders’ rights in the takaful fund