Shariah Scholars and Industry Stakeholders Discuss Issues on Financial Safety Nets at the IFSB-ISRA Shariah Roundtable
19 November 2015, Kuala Lumpur - The Islamic Financial Services Board (IFSB) and International Shariah Research Academy for Islamic Finance (ISRA) have successfully organised a Shariah Roundtable themed, ‘Financial Safety Nets: Striking a Balance between Shariah Requirements and the Soundness of the Islamic Financial System’. The Roundtable was held on 5 November 2015 in Kuala Lumpur, Malaysia.
The Roundtable aimed to provide a platform to Shariah scholars, legal practitioners, regulators and market players for having in-depth deliberations on key aspects of financial safety nets such as Lender of the Last Resort (LOLR) and Deposit Insurance Schemes from the Shariah perspective.
Over 70 delegates from nine jurisdictions among the IFSB members and non-member organisations – representatives from market players, regulatory bodies, and international agencies – Shariah scholars as well as academia attended this Roundtable.
Mr. Jaseem Ahmed, the Secretary-General of the IFSB, in his Opening Address, highlighted that financial safety nets feature as a key component of an integrated financial stability framework, the importance of which was highlighted during the global financial crisis. He emphasised that safety net mechanisms such as lender of last resort facilities and deposit insurance schemes should be compatible with Shariah principles. To offer these schemes in a wider set of jurisdictions, it would be important for Shariah scholarsto lead the discussion along with regulators, market players and legal practitioners in order to identify the major obstacles, issues and challenges in introducing such facilities on Shariah- compliant basis. Mr Jaseem also informed the audience that Shariah scholars play a pertinent role in the work of the IFSB – their role is embedded in the due process of preparing the IFSB standards and guiding principles – where the members of the Shariah Board of the Islamic Development Bank vet thoroughly and review the IFSB draft document prior to submission to the IFSB Council for issuance. The Shariah community also has the opportunity to provide feedback during the document’s public consultation phase.
Professor Dr. Mohamad Akram Laldin, Executive Director of ISRA, in his Opening Address, highlighted the need for a more collaborative approach between the various stakeholders that would help to develop synergies and support the growth of Islamic financial services industry on a sound footing. He also stressed that Shariah is the backbone of this industry, as it is the key distinguishing factor that makes Islamic finance distinct from the conventional finance. Finally, he reiterated the importance of following the broader principles of Shariah to devise instruments for financial safety nets and other products for consumers.
The Opening Session was followed by a presentation on the IFSB’s key activities and strategic focus by Dr Sherif Ayoub, Assistant Secretary-General of the IFSB, who enlightened participants on the key role Shariah scholars play in reviewing and providing feedback on the draft prudential standards during various stages of the development process.
The session on LOLR was preceded by a presentation entitled, Strengthening the Financial Safety Net: The Role of Shariah-compliant Lender-of-Last-Resort Facilities as an Emergency Financing Mechanism by Mr. Jamshaid Anwar Chattha, Chief Financial Analyst, Financial Stability Office/Supervision Sector, Central Bank of Kuwait. Mr. Jamshaid provided an overview of the concept of financial safety nets and highlighted the operational and Shariah issues faced by central banks in the provision of an LOLR facility to Islamic banks. He also shared with the audience the experience of Central Bank of Kuwait in providing Shariah-compliant LOLR facilities.
The first session of the Roundtable, themed, Lender of Last Resort Facilities – Structuring Shariah-Compliant Instruments and Mechanisms was chaired by Professor Dr. Ashraf Md Hashim, CEO, ISRA Consultancy. The speakers for this session were two members of the ISRA Council of Scholars, Sheikh Professor Dr. Mohamed Ali Elgari, and Sheikh Dr. Oni Sahrani who presented their papers on the session theme. Sheikh Mohamed Elgari highlighted key characteristics of an effective LOLR mechanism and provided his critique on the currently practiced Shariah-compliant LOLR structures. He then proposed two modified mechanisms; the first one based on the idea of dailyMudarabah contracts, in which an Islamic bank would act as a working partner (Mudarib) and the Central Bank would act as the capital provider. The second alternative proposed by him relied on the use of modified repurchase agreements. Sheikh Sahrani elaborated on the importance of LOLR facilities for Islamic banks and overall stability of the Islamic financial system. He also proposed various alternative structures to meet the objectives of LOLR, such as financing through Mudarabah, sale with a promise of repurchase, establishing a joint fund for the purpose of liquidity management, providing interest-free loans by the central bank and the issuance of investment Sukuk.
The two discussants who participated in this session were Mr. Badlisyah Abdul Ghani, President of the Chartered Institute of Islamic Finance Professional (CIIF), Former CEO of CIMB Islamic, Malaysia and Professor Dr. Engku Rabiah Adawiyah Engku Ali, Professor, International Islamic University Malaysia (IIUM). Mr. Badlisyah pointed out the importance of using the right approach when communicating the Shariah requirements to the central banks, and the need to find the best way to implement and execute theShariah-compliant LOLR facilities in an effective manner. On the other hand, Professor Engku Rabiah commented on the proposed mechanism of daily Mudarabah contracts by highlighting some of the possible Shariah issues that could arise in relation to its implementation and observed that a Wakalah structure can also be used as an alternative in which the central bank will act as the principal and the Islamic bank will act as an agent. Moreover, she shared with the audience some Shariah issues in undertaking the repo agreements.
The afternoon session started with a presentation from Mr. Syed Faiq Najeeb, Member of the Secretariat, Technical & Research, IFSB, themed Strengthening the Financial Safety Net: The Role and Mechanisms of Shariah-compliant Deposit Insurance Schemes. Drawing from the IFSB survey and draft paper on this subject, he deliberated on the importance of developing deposit insurance schemes on Shariah-compliant basis, which are considered an indispensable component of financial stability regimes in the post crisis world. He also highlighted the current Shariah-compliant models of deposit insurance schemes that are being implemented in different jurisdictions and the operational andShariah challenges that need to be considered in the implementation of these schemes.
Shariah-compliant Structures for a Deposit Insurance Scheme was the theme of the second session. The chairperson of the session was Sheikh Dr. Nizam Mohammad Salih Yaquby, a member of ISRA Council of Scholars. The speakers for this session were Sheikh Professor Dr. Ali Muhyi al-Din Ali al-Quradaghi, Research Fellow, ISRA andAssociate Professor Dr. Said Bouheraoua, Senior Researcher, ISRA and Editor-in-chief, ISRA International Journal of Islamic Finance who presented the paper of Sheikh Dr. Abdul Sattar Abu Ghuddah, a member of ISRA Council of Scholars. Sheikh al-Quradaghi gave a description of the three types of deposits which require protection – the current, saving and investment accounts. He emphasised that insuring current and saving accounts is similar to the insurance of debts. Therefore, it is permissible as long as the underlying concept being used is that of Takaful. As for the protection of investment accounts, the speaker noted that the capital of such accounts can be insured on the basis of Takaful by relying on two mechanisms. The first mechanism centers on the idea of a group of Islamic banks negotiating with the Takaful companies to receive the best possible Takaful coverage for the protection of the capital of their investment account holders. A second option is for the Islamic banks to establish a fund to cover any losses suffered by the investment account holders of any of the participating banks. Dr. Bouheraoua started by detailing the forms of Shariah-compliant capital protection schemes and proceeded to discuss in detail the key components and modalities of a Shariah-compliant deposit insurance scheme. He also touched upon some examples of Shariah-compliant deposit insurance schemes being implemented in several jurisdictions.
Three discussants participated in this session, which included Mr. Mohd. Sobri Mansor, Senior Manager, Malaysia Deposit Insurance Corporation, Dr. Hurriyah El Islamy, Group Co-Head, Shariah & Governance, CIMB Islamic Bank Bhd and Mr. Madzlan Mohamad Hussain, Partner & Head, Islamic Financial Services Practice, Zaid Ibrahim & Co. Mr. Mohd. Sobri pointed out that the purpose of a deposit insurance scheme is to protect the depositors and promote stability of a financial system, which necessitate the availability of such schemes to Islamic banks on a Shariah-compliant basis. This will provide a level-playing field to the Islamic banks and promote the sustained growth of the Islamic banking industry. He emphasised the importance of highlighting Shariah non-compliance elements present in conventional deposit insurance, which would clarify the need for offering Shariah-compliant mechanisms of deposit insurance. He added that it is also important to assess how the design features of a Shariah-compliant deposit insurance scheme (SCDIS) can conform to the criteria of an effective deposit insurance scheme. Dr. Hurriyah focused on legal challenges in offering SCDIS in various jurisdictions. She also elaborated on the insurability of various types of deposits that need protection and how they can be protected in a Shariah-compliant manner. Finally, Mr. Madzlan noted that the deposit insurance schemes for Islamic banks must not only be Shariah-compliant, they must also be legally effective by having the legal mandate and legal authority for it to be effective. He also drew the attention of the audience to the benefits of learning from the experiences of other countries in relation to the issue of deposit insurance.
The Roundtable ended with the affirmation that continued debate and engagement among various stakeholders of the industry on the issue of establishing Shariah-compliantLOLR and deposit insurance mechanisms will support the provision of these schemes in more jurisdictions, which would contribute to the strength and resilience of the Islamic finance industry.
The IFSB and ISRA plan to jointly publish a set of proceedings (in both Arabic and English languages) on the deliberations of the Roundtable for wider dissemination to the stakeholders in 2016.
Sitting from left to right: Jaseem Ahmed, Secretary-General, IFSB, Sheikh Prof. Dr. Ali Muhyi al-Din Ali al-Quradaghi, Council of Scholars, ISRA, Sheikh Dr. Nizam Mohammad Salih Yaquby, Council of Scholars, ISRA, Sheikh Prof. Dr. Mohamed Ali Elgari, Council of Scholars, ISRA, Sheikh Dr. Oni Sahrani, Council of Scholars, Prof. Dr. Ashraf Md. Hashim, Senior Researcher and CEO ISRA Consultancy Sdn Bhd
Standing from left to right: Prof. Dr. Engku Rabiah Adawiyah Engku Ali, Professor, International Islamic University Malaysia (IIUM), Dr. Abdulbari Mashal, Chairman at RAQABA (Shari'a Audit & Islamic Financial Consultations, Badlisyah Abdul Ghani, President of the Chartered Institute of Islamic Finance Professional (CIIF) and Former CEO of CIMB Islamic, Malaysia, Dr. Sherif Ayoub, Assistant Secretary-General, IFSB, Assoc. Prof. Dr. Said Bouheraoua, Senior Researcher, ISRA, Zahid ur Rehman Khokher, Assistant Secretary-General, IFSB, Jamshaid Anwar Chattha, Chief Financial Analyst, Financial Stability Office/Supervision Sector, Central Bank of Kuwait and Dr. Hurriyah El Islamy, Group Co-Head, Shariah & Governance, CIMB Islamic Bank Bhd.
Session 1: Lender of Last Resort Facilities – Structuring Shariah-compliant Instruments and Mechanisms