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Regulatory measures to mitigate the impact of COVID-19: Recommendations for the Islamic Capital Markets

Date posted: 8 July 2020

The COVID-19 pandemic and the measures taken to prevent its spread have had an increasingly significant impact on the global economy and the global financial markets. Many IFSB member jurisdictions have had to take a range of extraordinary regulatory and supervisory measures to alleviate the impact of COVID-19 on financial stability in their jurisdictions and preserve the orderly functioning of markets. 

The main objective of this public statement is to recommend the highlighted areas for greater regulatory vigilance and appropriate regulatory responses across IFSB member countries to mitigate the negative economic effects of the COVID-19 pandemic and to ensure continued strong investor protection in the Islamic capital markets during these unprecedented times.

In the current environment of heightened uncertainty and market volatility in the capital markets, the IFSB recommends that regulators encourage firms operating in the Islamic capital market to exercise even greater care in their duty to act in the best interests of their clients, ensure fair treatment of clients and comply with all relevant governance and conduct of business obligations. 

Islamic Capital Market Intermediaries

Capital market regulators may emphasise the importance of providing appropriate information in good time to clients or potential clients, with regard to the firm and its services and the Sharīʿah-compliant financial instruments offered so that clients can make informed investment decisions, ensuring that all information provided to clients is fair, clear and not misleading.

Regulators may stress that both internal and external Sharīʿah governance and control mechanisms of the firm are complied with and that firms should take necessary measures to ensure that these are not affected by the COVID-19 pandemic. If the firm accepts government support measures due to the impact of COVID-19, these should be in line with Sharīʿah rules and principles, which may be, for example, based on a donation or a tawarruq that meets Sharīʿah requirements. 

If the Sharīʻah compliance status of the investments made through the firm is affected as a result of COVID-19, such as financial screening ratios exceeding the required threshold due to market volatility or government support measures or financial restructuring, firms may be given a grace period due to the extraordinary circumstances. However, if the business activity screening threshold is exceeded, then regulators may advise firms to inform clients that there is a change in Sharīʻah-compliance status, disclose any relevant fatwa issued by the Sharīʻah board, exit that investment and undertake purification processes for any non-Sharīʿah-compliant income, or invite the client to do so. 

In general, regulators should also be aware that strained operational circumstances may lead to compliance weaknesses in firms. For instance, these may arise from remote working or from lack of access to information, including informal information on which compliance officers rely, such as observation of traders’ behaviour.  There may also be pressure from operational departments to allow changes to normal working and control arrangements, which may pose compliance risks.  These range of issues might affect any area of compliance, from Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) through to the acceptance of trading risk. 

Listed entities

In relation to Sharīʿah-compliant listed companies  in the jurisdiction, in order to ensure adequate transparency and disclosure during extraordinary circumstances, regulators may emphasise the need to assess and disclose the operational impact of COVID-19 on the company’s performance, emphasising the disclosure of all information material to voting and investment decisions in line with the obligations under the jurisdictions listing requirements, so that investors can make informed decisions. 

The assessment and disclosure by a listed company may include how COVID-19 has impacted the financial condition and results of operations; capital and financial resources; any material impairments that are anticipated; how it affects the ability to maintain operations of the company as well as any disruptions or challenges in maintaining financial reporting systems and internal controls; all information (or update to prior disclosures), that may be required by a Sharīʿah screening authority to review its compliance status based on Sharīʿah-screening methodologies and the related financial ratios  used in the jurisdiction; and any other material operational impacts on the company.  The list is illustrative but not exhaustive and each listed company may be expected to carefully assess the impact of COVID-19 and related material disclosure obligations as per a jurisdiction’s regulations and listing requirements, and its own circumstances, providing disclosures tailored to provide material information about the impact to investors and market participants.  

Where it is deemed necessary, a regulator may provide flexibility such as an extension to listed companies for reporting of financial impact to take proper account of the impact of the crisis on the company’s’ financial position as well as the positive impact of government support measures. Any disclosure requirements specific to COVID-19 may be at the discretion of the regulator after weighing the specific circumstances and risks against the need for transparency and investor protection. 

Regulators may emphasise that when listed companies disclose material information related to the impacts of COVID-19, that the necessary steps should be taken to avoid selective disclosures by disseminating such information widely to the public. Depending on a company’s particular circumstances, it may also consider whether it needs to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.

Regulators should be particularly vigilant in rapidly changing circumstances to watch for signs of insider dealing or market manipulation.

Regulators should also be aware of the likelihood of needing to deal with listed company failures in which (past) malpractice is exposed by a downturn, and to take enforcement action as appropriate.


Regulators should be alert to the possibility of sukuk failures/restructurings, which may give rise to arguments purported to be in relation to areas that are relevant to Sharīʿah-compliance. 

Suitability and Appropriateness requirements

Regulators may also remind firms of existing suitability and appropriateness requirements, paying particular attention to the possible ramifications of the COVID-19 crisis for the client’s personal situation and the risk profile of his financial instruments to ensure that these financial instruments are suitable for the client. 

Best Execution

In relation to best execution of client orders in more volatile market conditions, it is likely that clients might give higher priority to speed of execution because of the increased risk of a price change during any delay. Therefore, regulators may recommend that client preferences need to be considered dynamically by firms executing client orders, especially in volatile markets.  

Market volatility also increases the potential adverse consequences of any failures in areas like the order in which client instructions are executed. Regulators may advise firms to take this into account and to duly observe best execution rules during such periods by ensuring that orders are executed in the best interest of clients.

Cyber Risk Management

Given the increased use of online platforms by firms for transactions and operations, as well as staff working remotely from their normal place of work, and possibly on computers other than those they normally use for work purposes, the need to ensure that there are adequate processes and measures in place for cyber risk management should also be a top priority.  

Client Assets

Client assets (both money and securities) should remain properly protected in light of COVID-19.  Regulators may consider whether enhanced supervisory attention should be given to client asset audits, especially in any intermediaries deemed at risk.

Handling Investor Complaints

The ongoing pandemic and the associated public health measures can make it more difficult for firms to deal with investor complaints. However, it is important for regulators to emphasise that firms continue to handle complaints and do this fairly. In such circumstances, regulators may require firms to prioritise: (i) prompt payment to those who have already been offered redress and have accepted that offer; (ii) the prompt and fair resolution of complaints from investors who are likely to be vulnerable to harm if their complaint is not resolved promptly and fairly, as well as micro-enterprises and small businesses who are likely to face serious financial difficulties if their complaint is not resolved promptly and fairly; and (iii) sending timely holding responses where clients’ complaints cannot be resolved promptly.

Investor Education and Investor Alerts

Retail investors are also often more vulnerable to scams during global or national crises such as COVID-19, particularly those that capitalise on public concern and fear. Regulators should therefore continue to actively monitor their markets for frauds, illicit schemes and other misconduct affecting retail investors, issue investor alerts to warn investors about investment frauds that have been identified by the regulator and use enforcement tools as appropriate. Regulators may also take steps to educate investors on how to avoid fraud and protect themselves, including what investors should look out for, such as unlicensed individuals or unregistered firms or those involving promises of guaranteed high investment returns and unsolicited investment offers etc.

The IFSB will continue to assess and address the implications of COVID-19 on investor protection and financial stability in the Islamic capital market and provide ongoing guidance as necessary.

Including companies which have listed securities other than equities.

If the firm receives government support/grants that involve interest which will affect the financial screening ratios, this should be disclosed by the firm. If financial screening ratio thresholds are affected, they may be allowed a grace period due to extraordinary circumstances.

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