DIGITALISATION PLATFORM

Regulation of Digital Islamic Banking

Technological advancement presents new regulatory and supervisory challenges for financial sector regulators. RSAs have been generally cautious about ensuring that a favourable disposition towards technological financial innovation does not infringe on financial market integrity and stability, and the protection of consumers. As such, RSAs in jurisdictions where Islamic banking is practiced, are adopting different regulatory approaches towards the digitalisation of banking operations to support broader policy objectives like financial inclusion, contestability, competition, and customer value. Depending on the policy objectives, market maturity, and availability of both financial and non-financial enablers, some jurisdictions have bespoke regulations for their digital banking others have adopted and applied extant banking regulations to digital banks.

The objective and scope of the WP

Based on an extensive desktop review of regulations and related documents, and responses to be elicited via a survey questionnaire, the proposed paper is envisaged to present an in-depth discussion and comparison of these various approaches highlighting commonalities and distinctions across jurisdictions where digital Islamic banking is practiced. This will be in specific terms of licensing and capital requirements, supervisory oversight and regulatory regimes, permissible activities, the extent of physical presence and automation of Islamic banking service rendering, ownership structure, fit and proper criteria, and allowance and duration of regulatory and supervisory forbearances and restrictions. Other areas of coverage include but are not limited to concerns about the need for Sharīʻah considerations in digital products and financial apps development in response to the perceived “Sharīʻah neutrality” of technology. market conduct and consumer protection, digital financial literacy plans, pricing, use of third parties, data privacy and protection, cybersecurity, and dispute resolution. A gap analysis will be developed vis-à-vis what other standard-setting bodies have done or plan to do to establish a rationale for any future standards development work of the IFSB in the area.

Regulation of Islamic P2P Financing and Crowdfunding

Due to the increase in internet usage, awareness, and unmet financing needs, Peer to Peer (P2P) and other forms of crowdfunding are arguably the most prominent vertical in Islamic Fintech. Crowdfunding has played a crucial role in providing Shari’ah-compliant funding to small and medium enterprises (SMEs) and emerging start-ups, which hitherto were underserved by the mainstream institutions offering Islamic financial services. As the volume of Islamic crowdfunding platforms and the participation of both retail and institutional investors increase, the question often arises whether a bespoke regulation which is needed to cater to its specificities, and how to ensure a proper balance between regulatory stringency which may stifle innovation, and relaxation which may hinder consumer protection. This question usually centres around issues relating to the diversity of Islamic crowdfunding including donation, equity, reward, projects, and term-based funding. Other issues include the protection of investors especially the private and other stakeholders who may be unsophisticated, systemic risk prevention, money laundering and financing of terrorism, and cross-border limitations and legal uncertainties, etc which have been linked to the lack of regulatory regimes and Shari’ah governance framework in many jurisdictions where Islamic crowdfunding and P2P financing is practiced.

The objective and scope of the WP

Based on an extensive desktop review of extant regulations and related documents, and responses to be elicited via a survey questionnaire, the proposed paper is envisaged to present an in-depth discussion and comparison of these various regulatory regimes highlighting commonalities and distinctions across jurisdictions where Islamic crowdfunding is practiced. This is to facilitate the growth of Islamic crowdfunding while also safeguarding financial consumers. Specifically, the paper will cover the transformation of business models, licensing and capital requirements to ensure operation continuity, custodian requirements, supervisory oversight, and regulatory regimes. Other aspects include permissible activities and appropriateness of instruments offered to investors in the light of both legal and Sharī’ah compliance, the relationship between Islamic crowdfunding platforms and Islamic banks, treatment of platform insolvency, Sharī’ah governance framework, market conduct, consumer protection, information disclosure, and dispute resolution, etc. A gap analysis will be developed vis-à-vis what other standard-setting bodies have done or plan to do to establish a rationale for any future standards development work of the IFSB to address the specificities in Islamic crowdfunding and P2P financing regulation.