Opening Remarks by H.E. Mr. Tarek Amer, Governor, Central Bank of Egypt at the 13th Islamic Financial Stability Forum- “Consumer Protection Islamic Finance”
Date posted: 12 April 2016
Date: 12 April 2016
Event / Venue: 13th Islamic Financial Stability Forum | Cairo, Egypt
Speaker: H.E. Mr. Tarek Amer, Governor, Central Bank of Egypt
بسم الله الرحمن الرحيم
Distinguished Governors, Deputy Governors, and Central Banks’ Officials of the IFSB Board of Directors, IFSB Secretary Officials, and Colleagues; السلام عليكم ورحمة الله وبركاته it is my pleasure to be among all of you today, and I would like to welcome all of you to your second home Egypt.
Over the last decade we have observed the emergence of Islamic finance on the international financial landscape, and now we are witnessing the growing globalization of Islamic finance. In light of this, consumers of Islamic financial products have increased to a sound proportion, and the need for consumer protection frameworks that cater to the specifics of Islamic financial products should be an integral part of regulatory frameworks in countries where the industry exists.
One of the numerous lessons learned from the global financial crisis, is that, inadequate attention to consumer protection can lead to financial instability, this is why after the global financial crisis, financial consumer protection gained great consideration on the political agendas of governments and international standard setters. The issue was taken up by the Organization for Economic Co-operation and Development and the Group of Twenty (G20), which issued in 2011 the G20 High-level Principles on Financial Consumer Protection. The most important principles are transparency, impartiality and reliability.
A number of international bodies, including the Islamic Financial Services Board, The Accounting and Auditing Organization for Islamic Financial Institutions, and the International Islamic Financial Market, have issued standards to cater to the specifics of the Islamic finance industry, also an international Monetary Fund working paper that sets some standards was authorized for distribution, but the adoption of standards has been uneven across countries and the development of standards is still evolving. At the jurisdiction level, many countries integrated consumer protection in their regulatory frameworks, but progress has been uneven across countries and few have tailored the frameworks to address the unique risks of Islamic finance.
Consumer protection and financial literacy are essential pillars of a well-functioning and stable financial system. Inadequate understanding of the risk inherent in financial products, due to insufficient disclosures or low financial literacy, can lead consumers to take on excessive debts, which may impact banking system stability. Inadequate information about entailed risks can also cause panic and herd behavior among investors which can accelerate crises situation.
Effective financial education and awareness campaigns help individuals to understand financial risks and products, thus taking better decisions that adapt to their personal circumstances.
Ensuring stability of financial institutions also assist in protecting consumers from losses, thus effective prudential regulations should be an integral part of consumer protection framework. In addition, institutional arrangements, such as deposit insurance schemes, also help protect consumer from financial losses contributing to financial stability and development of the Islamic finance industry. These processes instill public confidence in the sector, help maintain the competitiveness of Islamic deposits in respect to conventional deposits, prevent any outflow of Islamic deposits from Islamic banks to conventional banks, which helps in maintaining stability.
While measures for financial consumer protection in the Islamic Financial Services Industry are broadly similar to those applicable to the conventional system, some additional dimensions are considered and a major consideration is that regulators of Islamic Finance have to consider the claim of Sharīʻah compliance as an essential and distinguishing product feature. In view of this, one of the primary objectives of consumer protection is that regulators should take adequate measures to ensure that the aforementioned claim is sufficiently justified. This matter can be addressed by these regulatory and supervisory authorities from a consumer protection perspective.
Overall, some areas that need further examination and reform for Islamic finance include catering for customer protection within legal and regulatory frameworks, providing regulatory clarity for investment account holders, fulfillment of disclosure requirements, monitoring compliance with Sharīʻah principles and dispute resolution frameworks, among others.
Sharīʻah principles govern Islamic finance adequately, and provide a strong foundation for consumer protection; on the other hand, these features alone cannot guarantee adequate protection for consumers, as not all financial institutions providers are motivated by ethical practices, and the practice sometime deviate from the principles. In this regard, reforms are needed to protect consumers from current unethical practices.
I hope this forum will be of great benefit as it will examine and draw on experiences in developing consumer protection framework for Islamic Financial Services industry. It should also identify opportunities and directions for future work in this critical area.
And with that, I would like to thank you all for attending this forum, wishing that you all gain a lot of knowledge and I look forward to seeing all of you next year at the annual meeting إن شاء الله.
Thank you again, and have a safe and pleasant journey.
السلام عليكم ورحمة الله وبركاته
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