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The IFSB Council Adopts Three New Standards for the Islamic Financial Services Industry

Date posted: 6 December 2018

6 December 2018, Jeddah, Kingdom of Saudi Arabia – The Council of the Islamic Financial Services Board (IFSB) today has resolved to approve the adoption of three new standards in its 33rd Meeting in Jeddah, Kingdom of Saudi Arabia.

The three new standards are:

  • IFSB-20: Key Elements in the Supervisory Review Process of Takāful / Retakāful Undertakings [Islamic Insurance Segment];
  • IFSB-21: Core Principles for Islamic Finance Regulation [Islamic Capital Market Segment]; and
  • IFSB-22: Revised Standard on Disclosures to Promote Transparency and Market Discipline for Institutions Offering Islamic Financial Services (IIFS) [Banking Segment].

IFSB-20: Key Elements in the Supervisory Review Process of Takāful / Retakāful Undertakings [Islamic Insurance Segment]

IFSB-20 aims to guide the firm-level supervision of Takāful / Retakāful Undertakings (TUs/RTUs) by providing guidance on the implementation of common approaches to the supervision of the takāful and retakāful industry, while addressing the specificities of these institutions. This is to protect the interests of the contracting parties in the TUs/RTUs and the long-term stability of the takāful system. The standard describes key elements of the supervisory review process, which are made up of seven essential elements for supervision of TUs/RTUs. These elements present a clear overview on issues involved in the supervision of takāful and retakāful sector in an integrated form.

IFSB-20 has the following main objectives:

  • Provide guidance to supervisors on minimum standards for an effective and efficient supervisory review process for Takāful / Retakāful Undertakings, addressing the unique elements of these institutions;
  • Promote, by means of supervisory review, fair, safe and stable takāful and retakāful markets for the benefit and protection of participants; and
  • Encourage harmonisation of supervision internationally, and enhance cooperation among supervisors.

IFSB-21: Core Principles for Islamic Finance Regulation [Islamic Capital Market Segment

IFSB-21 sets out 38 high-level core principles and their associated assessment methodology which sets out a broad general framework for the regulation of Islamic capital markets (ICM). The core principles in the new standard take into consideration the specificities of Islamic finance, while complementing the existing international standards, principally ‘Objectives and Principles of Securities Regulation’ and its ‘Methodology’ (May 2017) issued by the International Organization of Securities Commissions (IOSCO).

In particular, the objectives of the CPIFR- Islamic Capital Markets are:

  • Provide a minimum international standard for sound supervisory practices for the regulation and assessment of the ICM;
  • Protect consumers and other stakeholders by ensuring that the claim to Sharīʻah compliance made explicitly or implicitly to any ICM product or service is sound and supported by appropriate disclosures;
  • Enhance the soundness and stability of the ICM – as an integral part of the Islamic financial services industry (IFSI) and the global financial system – by assisting regulatory and supervisory authorities to evaluate the quality of their relevant supervisory systems and identify areas for improvement as an input to their reform agenda.

The IFSB envisages that IFSB-21 will be used by jurisdictions as a benchmark for assessing the quality of their regulatory and supervisory systems, and for identifying future work to achieve a baseline level of sound regulations and practices for ICM products and services. Furthermore, the CPICM is targeted towards assisting IFSB member jurisdictions in: (a) the financial sector assessment programme (FSAP) conducted by the International Monetary Fund and the World Bank ; (b) self-assessments; (c) reviews conducted by private third parties; and (d) peer reviews conducted, for instance, within regional groupings of capital market regulatory and supervisory authorities.

IFSB-22: Revised Standard on Disclosures to Promote Transparency and Market Discipline for Institutions Offering Islamic Financial Services (IIFS) [Banking Segment]

IFSB-22 updates the IFSB's previous standard on disclosures for the banking segment, IFSB-4 (December 2007), in line with the following publications issued by the Basel Committee on Banking Supervision (BCBS): (i) Pillar 3 disclosure requirements – consolidated and enhanced framework, issued in March 2017; (ii) Revised Pillar 3 disclosure requirements, issued in January 2015; (iii) Consultative document for Pillar 3 disclosure requirements – updated framework, issued in February 2018; and (iv) Technical Amendment for Pillar 3 disclosure requirements – regulatory treatment of accounting provisions, issued in March 2018. The Standard specifies a set of key principles and practices to be followed by Islamic banks in making disclosures, and aims to promote consistency and comparability of disclosures by introducing harmonised templates for the disclosure of quantitative information of key areas including capital adequacy, regulatory risk exposures, investment accounts and Sharīʻah governance, among others.

The objectives of IFSB-22 are to:

  • Facilitate access to relevant, reliable and timely information by market participants generally, and by investment account holders in particular, thereby enhancing their capacity to monitor and assess the performance of IIFS;
  • Improve comparability and consistency of all disclosures made by IIFS;
  • Support financial consumer protection by offering useful information disclosures on Islamic banking products; and
  • Enable market participants to complement and support, through their actions in the market, the implementation of the IFSB standards.

Disclosure requirements set out in IFSB-22 are designed to enable market participants, especially the investment account holders, to assess key information on: (1) the type of IIFS and the scope of the consolidation method used by members of an Islamic financial group; (2) capital structure and overview of capital adequacy; (3) linkages between accounting and regulatory scopes of consolidation; (4) the treatment of investment accounts, including their risks and returns; (5) the risk management process; (6) asset encumbrance; (7) key aspects of general governance and Sharīʻah governance; (8) the treatment of Islamic windows; (9) consumer protection; and (10) economic, social and environmental impact initiatives. Such disclosures, when combined with adequate market and legal infrastructures, can improve consumer protection practices among IIFS and enable market forces to enhance the stability and soundness of Islamic finance and reinforce other IFSB standards.

The softcopies of IFSB-20, IFSB-21 and IFSB-22 will be available on the IFSB website, www.ifsb.org in both English and Arabic languages in due course.

The 33rd meeting of the IFSB Council, hosted by the Islamic Development Bank Group (IsDB), was held on 6 December 2018 in Jeddah, Kingdom of Saudi Arabia. The Council Meeting was chaired by H.E. Dr. Mohammad Y. Al Hashel, the Governor of the Central Bank of Kuwait and Chairman of the IFSB for 2018, attended by the President of the IsDB, H.E. Dr. Bandar Mohammed Hajjar, 12 central bank Governors and Commissioners of regulatory and supervisory authorities, and 10 senior representatives from among the Council and Full members of the IFSB, representing 19 countries.

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