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End of journey for Rifaat at the IFSB

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Points of Essence

  • There has been a shift of stewardship at the Islamic Financial Services Board since April this year.
  • An interview with the IFSB’s former Secretary General, Prof. Rifaat Abdel Karim, will shed some lights into the pioneering efforts behind the establishment of the IFSB and the challenges it faced to emerge a global Islamic financial authority.      

By MUSHTAK PARKER | ARAB NEWS

Published: May 8, 2011 19:39 Updated: May 8, 2011 19:39

Professor Rifaat Abdel Karim is the inaugural secretary general of the Kuala Lumpur-based Islamic Financial Services Board (IFSB), the multilateral prudential and supervisory standard setting organization for the global Islamic financial services industry. He was appointed in November 2002 and the board officially started operations in March 2003. During his watch, the organization increased from its nine founding members to 195 to date, including 53 regulatory authorities and central banks from 41 jurisdictions. During that time the IFSB has also published 14 standards relating to various products governance issues. Rifaat resigned last year and his tenure came to an end in April 2011, making way for a new secretary general. In the first installment of a two-part in-depth and unique interview, Rifaat discusses with Arab News the circumstances of the establishment of the IFSB; the major role that the IMF (International Monetary Fund), the Basle Committee and the Asian Development Bank played in its early years and continues to play today; and the political battle that had to be resolved to decide where the new organization would be located.

In what state are you leaving the IFSB?

When the IFSB started we only had nine members, comprising eight central banks and one multilateral, the Islamic Development Bank (IDB). This marked the beginning of the inter-cooperation between central banks and regulatory authorities and therefore the industry. In the past they used to work unilaterally. As such this cooperation facilitated by the IFSB could be considered as one of the main turning points of the contemporary Islamic finance industry. The IFSB was conceived in a conference themed “Regulation of Islamic Banks” that was held at AAOIFI (the Accounting and Auditing Organization for Islamic Finance) in Manama around 2000. I invited the IMF to coorganize it with us. The recommendations that were drafted at the conference suggested establishing the IFSB as part of AAOIFI. At the time I had the view that AAOIFI could be developed into a single standard setting body. We had the accounting and Shariah standards covered. The only thing missing was the regulatory prudential and supervisory ones. We had already issued a capital adequacy paper at AAOIFI in 1999 so the intellectual basis was already in place. Capital adequacy is a regulatory issue. At that time the Basle Committee could not cover Islamic finance because the IFSB mandate was only for those initial nine countries.

Initially the policy-making committee of the nine founding members in a breakfast meeting in February 2000 endorsed the recommendation that the IFSB should be part of AAOIFI. During the summer something happened and the policy-making committee decided that the proposed IFSB should be outside AAOIFI but should still be based in Bahrain. Some countries agreed with the first part that the IFSB should be separate from AAOIFI which is an accounting standard setting entity, but they did not agree that it should be necessarily headquartered in Manama. It took two years to resolve the location where the IFSB should be based. It also took sometime to decide who the first secretary general should be and that there should be no poaching of personnel. The IFSB subsequently was launched in November 2002 and started operations on March 10, 2003. We started with only nine members.

Is it true that there was a political trade-off between Bahrain and Malaysia over the location of IFSB?

The IMF was facilitating the whole thing. They called a meeting in Paris of the proposed founding governors of the IFSB because traveling to the US post 9/11 was difficult. In fact, we discussed this issue first at a side meeting in 2000 during the World Bank/IMF Annual Meeting in Prague when it was recommended that IFSB be set up separately from AAOIFI. The Bahraini delegation in Prague maintained that IFSB should be based in Manama. A counter-proposal came from the Malaysian Minister of Finance II who declared that Malaysia would be willing to host the IFSB. The IMF itself does not get involved in where an institution should be based. They only help facilitate the building and implementation of the required architecture. In the Paris meeting it was finally agreed that the International Islamic Financial Market (IIFM) should be located in Manama and the IFSB in Kuala Lumpur.

In hindsight do you think that was the right decision?

In terms of the IFSB I think it was a good decision. The government of Mahathir Mohammed enacted a special law enabling the establishment of the IFSB which gave the board special privileges as an international organization. In addition to that Bank Negara Malaysia said it would provide offices for the IFSB, which they did. Literally, the IFSB got a lot of official backing, which gave it the credibility with all the other central banks. These were the ingredients of success if you like. Unlike the IDB, the IFSB articles of agreement never stipulated that membership must be confined to OIC (Organization of Islamic Conference) states. If it was confined to the OIC, we would have limited the growth of the Islamic finance industry. But, by providing a platform of credible central banks, it paved the way for other central banks to join the IFSB.

So even your full member category is not confined to OIC countries?

Exactly. Singapore, for instance, is a full member, a member of the IFSB Council and a member of the IFSB Executive Board. The only thing is you have to show that your jurisdiction is proactive in terms of Islamic finance enabling legislation and market practice. Our mandate at the IFSB is to adapt to the existing international standards for financial services – banking, finance, capital market and insurance (Takaful) – by taking into consideration the specificities of the Shariah. This meant that for banking we had to look at the Basle Committee directives; for capital market we had to consider the IOSCO (International Organization of Securities Commissions) pronouncements; and for insurance we had to engage with the International Association of Insurance Supervisors deliberations. One of the first international agencies to join IFSB was the Bank for International Settlements (BIS), which facilitated many openings for us especially with the Basle Committee and IAIS, which are both housed at the BIS. The BIS came on board with the IFSB also because both organizations have very strong common members including Saudi Arabia and Malaysia. The BIS were impressed that it was implicit in the mandate of the IFSB to adapt to Basel II provisions for instance Pillar II but within the specificities of Islamic financial principles. It was not good for the industry to work in isolation of the global financial system, because Islamic financial Institutions (IFIs) have to operate within the global financial system. We also managed to spread our net very wide. We managed to get the central banks of Japan, China, Singapore, South Korea and Hong Kong to join. Singapore even became a full member. Another big achievement was to get the Asian Development Bank to join. They first started as an Observer and then progressed to start giving the IFSB technical assistance.

Are you disappointed that Luxembourg is the only European member of the IFSB?

Our job is to make the platform available and it is up to others to decide whether our value proposition presents an opportunity for them.

What level is the technical cooperation between the Basle Committee and the IFSB?

The IFSB sits on the Basle Committee as a group in its own right. We are also am member of the Core Principles Group of the Basle Committee. In addition the Basle Committee also speak and participate in the IFSB working groups. We have a close cooperation. In this way the Islamic finance industry through the IFSB membership of the core principles group and other committees also has an input in new architecture such as Basel III. This also allows the IFSVB to plan ahead in terms of its own standards. For instance, we are in the process of finalizing a standard on liquidity risk; and we are working to revise our capital adequacy standard to take on board Basel III.

Does the Basel Committee recognize or acknowledge the specificities of Islamic finance?

They do. They are part of the IFSB and that for us to adapt the Basel directives we have to do it within the specificities of the Shariah principles. They have no intellectual problem with that because the business model of Islamic finance is different. In the conventional banking, the business model is based on borrowing and lending. This is not the Islamic banking business model. You cannot impose this model on the Islamic finance industry. It will have implications for regulation and supervision. We now have 195 members, of which 53 are supervisory regulatory authorities from 41 jurisdictions. This was achieved in a mere eight years. In addition we have published 14 standards.

But can Islamic finance give something back to the Basle process especially in the light of the global financial crisis that may be conducive to contribute to financial stability and soundness in the conventional banking system?

The Basle Committee is welcome to look at the IFSB standards and to see how these can add value to their overall standards and directives. Our standards are in the public arena and there is a debate going on about the future direction of banking and how to pre-empt the excesses and to promote stability and soundness. They will look at it and if they see there work can benefit, they may consider it. It is not a one-way traffic.

It would be interesting to do a study on the Shariah view of capital, including subordinated and contingent capital as under Basle III?

The IFSB has not problem with capital. In fact we recently held two seminars on contingent capital – one in Kuala Lumpur and the other in Abu Dhabi — as part of a market consultation as a prelude to issuing a draft exposure.

Source:  Arab News
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Written by Suapi Shaffaii

May 9, 2011 at 9:28 pm

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