ISLAMIC FINANCIAL SERVICES INDUSTRY DEVELOPMENT: 10-YEAR FRAMEWORK AND FUTURE DIRECTION PRESENTED AT: 9th IDB Global Forum on Islamic Finance 24 June 2014 Jaseem Ahmed Secretary General
ISLAMIC FINANCIAL SERVICES INDUSTRY DEVELOPMENT: 10-YEAR FRAMEWORK AND FUTURE DIRECTION The 10-Year Framework and Strategies for the Islamic Financial Services Industry (IFSI) Roadmap for the Development of the IFSI The Role of Islamic Financial Services Board (IFSB) 2
THE 10-YEAR FRAMEWORK AND STRATEGIES FOR THE IFSI 3
BACKGROUND OF THE 10-YEAR FRAMEWORK In March 2007, the IFSB, in collaboration with IDB, IRTI, published The IFSI Development: 10-Year Framework and Strategies Purpose of the 10-Year Framework Holistic financial sector strategies Orderly development of an inclusive IFSI Making financial services relevant Enhancing access to financial services Promoting national, regional and international dialogue Sharing institutions and countries experiences Creating enabling legal, tax and regulatory environment Enabling the public to participate and benefit from mainstream economic and financial activities worldwide Source: IDB, IRTI 4
REVIEW OF THE 10-YEAR FRAMEWORK Factors necessitating the review of the 10-Year Framework Transformation and growth of the IFSI in terms of deepening of assets, greater awareness, as well as increasing policy, regulatory and institutional support Increasingly challenging economic and financial environments following the global financial crisis Significant developments taking place in the international financial landscape e.g. further regulatory and supervisory reforms to promote global financial stability In 2013, the IDB and IFSB initiated a Mid-Term Review (MTR) of the Ten-Year Framework To assess progress made by the industry in implementing the 2007 recommendations To amend the recommended Ten-Year Framework in the light of developments since its publication 5
MID-TERM REVIEW PROCESS A Forum on prelim. findings of the MTR of the 10Y Framework on 14 May 2013 in Kuala Lumpur, Malaysia A high-level Review Committee Meeting on 17 September 2013 in Istanbul, Turkey A Roundtable on the MTR of the 10Y Framework on 6 April 2013 in Doha, Qatar An industry-wide Survey between June and August 2013 for the RSAs and IIFS On 27 March 2014, the MTR of the 10-Year Framework and Strategies for IFSI Development was approved by the IFSB Council in its 24th Meeting held in Bandar Seri Begawan, Brunei 6
MID-TERM REVIEW OF THE 10-YEAR FRAMEWORK: DISTINCT FEATURES Establishment of a stronger Implementation Plan to be undertaken by the stakeholders of the IFSI Development of Key Performance Indicators to track individual progress Introduction of 3 new recommendations Introduction of 3 Pillars Enablement, Performance and Reach 7
MAIN FINDINGS OF THE 10-YEAR FRAMEWORK While none of the objectives of the original 10Y Framework has been fully achieved, there has been significant progress in the last five years across a number of important metrics. The IFSI continues to grow in terms of assets and geographical expansion. Growth is triggering large knock-on impacts nationally and globally, which, if sustained, could be transformative. Greater public awareness of Islamic finance. However, more work needs to be done to increase education and awareness. There is vigorous policy and regulatory support being provided in a number of national jurisdictions, taking up both the spirit and the form of the original 10Y Framework. While the national take up by policy makers and regulators is not seen uniformly across jurisdictions, once the IFSI grows beyond a certain size, it begins to receive the policy and institutional support that the 10-Year Framework called for. 8
RECOMMENDATIONS OF THE MTR The MTR of the 10-Year Framework provides 16 Core Recommendations which are categorised into 3 themes, as well as 20 Key Initiatives to support the implementation of the recommendations.. 16 CORE RECOMMENDATIONS ENABLEMENT Fostering conditions for the industry to thrive PERFORMANCE Enhancing the effectiveness of institutions REACH Expanding the set of potential beneficiaries of the industry 20 KEY INITIATIVES 9
WHAT S NEXT? The next step for all stakeholders of the IFSI is to bring the 16 Recommendations of the 10-Year Framework to life, taking into account the state of development of the IFSI in the respective jurisdictions 10
ROADMAP FOR THE DEVELOPMENT OF THE IFSI 11
THE CONTEXT OF INDUSTRY S STRONG GROWTH Islamic Banking Growth Trend The sector expanded by 15%-20% p.a. over the last five years Sukūk Outstanding Trend Takāful Contribution Trend Total Takāful contributions estimated to reach USD18.3 bln in 1H2013 Islamic Financial Assets by Region (1H2013) (USD bln) Source: Islamic Financial Services Industry Stability Report 2014 12
IS REDEFINING THE PROSPECTS FOR ISLAMIC FINANCE Post global financial crisis The issues of financial and social stability are increasingly viewed as being interconnected. The essence of Islamic finance the stress on the real economy, ethical practice, social impact. Alternative mode of financing Islamic finance as an alternative form of financing contribute towards sustainable economic and social development. Greater recognition of Islamic finance amongst developed economies prospects for raising investment funds by accessing the global pools of Sharī`ah-compliant savings. Product innovation To achieve lower costs for financial transactions, widen financial and social inclusion. The importance of shaping the regulatory perimeter in a way that is proportionate to the risks. Greater integration Increased cross-border financial flows and connectivity, greater collaboration among regulators and the private sector The importance of mutual recognition of the diversity of Sharī`ah opinions for Islamic finance to prosper across borders 13
THE STAKEHOLDERS OF THE 10-YEAR FRAMEWORK Educational institutions and knowledge providers Civil society and public opinion leaders Industry segments and market players Working towards achieving the 16 Core Recommendations of the 10Y Framework Regulatory authorities Customers Regional and institutional institutions Government authorities 14
HAVE KEY ROLES INDIVIDUALLY & TOGETHER Issue Sharī`ah-compliant securities to foster ICM Introduce national plans for the development of IFSI Encourage the participation of private sector Provide initiatives for the development of IFSI Governments Regulatory authorities Develop liquidity infrastructure and Islamic money market Adopt and implement international standards applicable to IFSI Establish Sharī`ah governance and Sharī`ah Supervisory Board Promote capacity building and awareness Contribute expertise to assist jurisdictions Identify and promote best practices Provide international standards Promote platforms for liquidity management Undertake R&D Multilateral bodies Enhance collaboration and awareness Private sector Undertake R&D efforts IIFS to comply with regulations & prudential standards Islamic banks and NBFIs providing microfinance and SME products Education institutions offering courses & training 15
AMIDST GROWING RECOGNITION BY INTERNATIONAL INSTITUTIONS At the international level, there is now increasing recognition that the rapid growth of Islamic finance is leading to the emergence of systemically important industry segments in a number of key economies. International Monetary Fund, World Bank and Asian Development Bank, etc. Larger role in supporting Islamic finance for development purposes, and to strengthen initiatives that contribute to soundness and stability of IFSI 16
THE ROLE OF IFSB 17
ABOUT THE IFSB Based in Malaysia, the Islamic Financial Services Board (IFSB) was officially inaugurated on November 2002, and started operations on 10 March 2003 Serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and Takāful OBJECTIVES o o o o o o o o Develop standards & recommend implementation Provide guidance on effective supervision and regulation & develop risk management & disclosure criteria Establish cooperation with international standard-setting bodies & member countries Enhance and coordinate initiatives to develop instruments & procedures for efficient operation & risk management Encourage cooperation among member countries Facilitate capacity-building & development of human capital Undertake research Establish database To this end, the work of the IFSB complements those of BCBS, IOSCO and IAIS BCBS (Banking) IOSCO (Capital Markets) IAIS (Insurance) SPECIFICITIES OF ISLAMIC FINANCE 18
THE IFSB S STRATEGIC PERFORMANCE PLAN (2012-2015) To provide greater coverage of the needs of its key stakeholders, the IFSB has identified four Strategic Key Result Areas (SKRAs) over the 2012-2015 period. SKRA 1 SKRA 2 Formulation, Adoption and Implementation, Publicising and Promoting Prudential Standards for Islamic Finance Technical Assistance and Capacity Building Increased adoption of the IFSB standards by the regulatory and supervisory authorities (RSAs) Expansion of coverage of the IFSI issue areas Increased adoption of IFSB standards by the RSAs SKRA 3 SKRA 4 Cooperation Enhancement (creating platform for cooperation) Communication and Information Sharing Improved cooperation with members of the IFSB Improved cooperation with non-members of the IFSB Improved understanding of issues or problems faced by members of the IFSB Increased utilisation of Islamic financial databases for quality decision-making by members Increased satisfaction of members with the services provided by the IFSB 19
IMPLEMENTATION PROGRAMMES 2007 2008 2009 2010 2011 2012 2013 2014 FIS Workshops FIS Workshops Country Programme FIS Workshops for RSAs FIS Speaker Programme FIS E-Learning Programme (Development of E-Learning Programme for IFSB Standards) In 2013, the IFSB conducted 13 Workshops (3 RSAs, 7 Regional, and 3 Speakers Programmes) Organise Regional FIS Workshops Invite external speakers for the FIS Workshops, in particular from member countries to share countries experiences Provide customised FIS Workshops that meet the members need IFSB-INCEIF Executive Forum 20
HOWEVER, RISING DEMAND POSES NEW CHALLENGES TO ENHANCE IMPLEMENTATION PROGRAMME Timeframe Most jurisdictions indicated a shortening of the timeframe to implement the Standards. o On average, 55% of the RSAs planned to implement between 1-3 years period o 12% planned within one year period Challenges The two key challenges faced by RSAs are: o The need to change the regulatory and supervisory framework, and o Lack of personnel with relevant knowledge/ experience/ training Technical Assistance 18 out of 32 (56%) RSAs preferred to seek direct technical assistance from IFSB for implementation of IFSB standards There is the need to significantly ramp up the IFSB s capabilities in direct TA programmes for a longer term support to the member countries 21
BUILDING BLOCKS FOR THE ORDERLY DEVELOPMENT OF IFSI Design and implementation of roadmap and sequencing of various policies Sequencing of policies Regulatory capabilities Capacity building of staff at RSAs and IIFS Product innovation Shariah scholars Public awareness Capacity development POLICIES Enabling framework Tax, legal and regulatory framework level playing field Shariah governance New laws or amend current law? Sovereign sukuk programme Islamic Interbank and money market instruments Monetary control Integrating Islamic finance into the government s agenda Liquidity risk management infrastructure Risk management framework in Islamic financial institutions Risk management at macroeconomic level 22
IFSB S COLLABORATION WITH IDB 2002 IDB joined the IFSB as one of the nine Founding Members Technical expertise Technical Assistance grant Meetings/ Awareness Programmes Publications Sits on the IFSB Technical Committee, the body responsible for advising the Council on technical issues Shari ah Board of the IDB that reviews and endorses the IFSB standards and guidelines Sits on various IFSB Working Groups for the development of the IFSB Standards USD 200k jointly with ADB USD 400k jointly with ADB USD 120k for FIS Workshops Council Meetings Hosted a number of the IFSB Council Meetings Hosted IFSB events, conferences and seminars at its headquarters in Jeddah, Saudi Arabia Joint organisation of various events 2007 Islamic Financial Services Industry Development: Ten- Year Framework and Strategies, in collaboration with IRTI, an affiliate of the IDB 2010 Islamic Finance: Global Financial Stability 2014 - Mid-term Review of the Ten- Year Framework, in collaboration with IRTI 23
Warmest Felicitations to Islamic Development Bank Group on its 40 th Anniversary 24
THANK YOU FOR YOUR ATTENTION Jaseem Ahmed Secretary General www.ifsb.org