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    IFSB Publishes Working Papers on Islamic Finance

    December 26, 2019

    IFSB published two working papers on regulatory and supervisory issues in Sharī`ah-compliant hedging instruments (WP-14) and intermediaries in the Islamic capital market (WP-13). Also, IFSB and the Arab Monetary Fund issued a joint working paper on money laundering and financing of terrorism (ML/FT) risks in Islamic banking (WP-12).

    Sharī`ah-compliant hedging instruments. This working paper investigates existing practices in relation to the use of Islamic hedging instruments and the regulatory and Sharī`ah compliance concerns raised across IFSB jurisdictions. The findings in this paper reveal that the risk profile of institutions offering Islamic financial services is not much different from the risk profile of the conventional banks; thus, credit risk, liquidity risk, and rate-of-return risk are the main risks for Islamic institutions. Asset-liability alignment and Wa’d emerged as the main hedging tools; however, in general, institutions offering Islamic financial services were either not using hedging instruments or lacked the motivation to utilize them. The working paper also reveals that about half of the institutions offering Islamic financial services that were surveyed were aware that specific regulations pertain to the use of Islamic hedging instruments; however, since the regulations were not standardized across the globe, the application of hedging instruments was minimal.

    Intermediaries in the Islamic capital market. This paper investigates the pertinent role played by intermediaries in the Islamic capital market. It considers four key core principles in IFSB-21 on core principles for Islamic finance regulation (Islamic Capital Market Segment) relating to the Islamic capital market intermediaries’ assessment of issues affecting their intermediation activities in IFSB jurisdictions. The findings in this paper reveal that there are commendable licensing and entry requirements in place in various jurisdictions, as well as ongoing assessments of due compliance by the Islamic capital market intermediaries with those requirements. While the Islamic capital market intermediaries are susceptible to conflict-of-interest risk, they nonetheless generally have internal mechanisms catering to the consequences arising therefrom. Finally, there seem to be procedures in place that provide early warning of potential failure of the Islamic capital market intermediaries prior to their infringing on the soundness and safety of the Islamic capital market.

    ML/FT risks in Islamic banking: This working paper explores the diverse risks of ML/FT activities in the banking system to identify whether these risks vary between conventional and Islamic banking. The paper discusses survey responses received from the banking regulatory and supervisory authorities on ML/FT. Overall, the paper does not find any significant difference in the ML/FT risks between conventional and Islamic banking. Most respondents believe that there is no merit in introducing specific regulations or preventive measures to address the ML/FT risks in Islamic banking. Since risk levels are largely similar in both conventional and Islamic banking, Islamic banks should adhere to their own country regulations and the Financial Action Task Force standards to combat ML/FT.

     

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    Keywords: International, Banking, Insurance, Securities, Hedging, Islamic Banking, Islamic Finance, Credit Risk, IFSB-21, Liquidity Risk, IFSB

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