December 27, 2017

IFSB issued a working paper (WP-07) on recovery, resolution, and insolvency issues for Institutions offering Islamic Financial Services (IIFS). The paper sheds light on several legal, structural, and operational issues in the context of recovery, resolution, and insolvency for IIFS. It endeavors to make policymakers, regulators, deposit insurance providers, and individual institutions aware of these challenges. The paper reiterates the need to harmonize Sharīʻah principles of recovery and resolution plans as well as bankruptcy and insolvency frameworks that are embodied in the existing legal systems.

The working paper also examines the applicability of FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions and other relevant international standards on this subject for IIFS. It identifies gaps in implementation of these standards, since these international standards do not take cognizance of unique characteristics of these institutions. The paper also examines the possibilities of adopting self-insured structures and mechanisms to help safeguard the IFSI. In this regard, bail-in features embedded in Additional Tier 1 and Tier 2 ṣukūk from regulatory and Sharīʻah perspectives are discussed in detail. The paper also attempts to investigate whether the bail-in concept of a mandatory debt write-down by a resolution authority is compatible with Sharīʻah. Overall, the paper aims to:

  • Review the requirements of a robust recovery and resolution framework through literature review and jurisdictional analysis
  • Consider and analyze key recovery, resolution, and bankruptcy principles in the context of Islamic finance industry practices and Sharīʻah requirements
  • Indicate issues that require further consideration by regulatory authorities/policymakers and IIFS regarding recovery, resolution, and bankruptcy

Additionally, the paper examines the treatment of investment account holders in an insolvency and the treatment of the profit equalization reserve (PER) and investment risk reserve (IRR) funds in this scenario. The discussions also highlight Sharīʻah debates on whether any profit-sharing investment accounts should be afforded Sharīʻah-compliant deposit insurance scheme, given their risk-sharing nature. The paper also focuses on recovery and resolutions aspects for debt-based contracts in Islamic finance, since a majority of global Islamic banking assets are based on these contracts.

 

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Keywords: International, Banking, Islamic Banking, IIFS, Recovery and Resolution Planning, IFSB

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