ISLAMABAD (November 27 2002) : The challenges ahead for adopting Islamic financial system in Muslim countries include further progress in addressing some of the technical issues including harmonisation of the legal and regulatory frameworks for Islamic financial institutions and their governance.
Furthermore, the development of adequate instruments, markets, and market infrastructure to support their operations, will be key in achieving the ultimate objectives of Islamic financing.
These observations have been made in the International Monetary Fund report named 'Islamic Financial Institutions and Products in the Global Financial Systems; Key Issues in Risk Management and Challenges Ahead'.
The report also discusses the challenges ahead for the Islamic Financial Services Board (IFSB), which was established after a meeting in Malaysia following discussions in Washington in April this year between the officials of some Islamic countries and Islamic Development Bank. The central bank governors of Bahrain, Indonesia, Iran, Kuwait, Lebanon, Malaysia, Pakistan, Saudi Arabia, Sudan and the UAE attended the Washington meeting. The idea was to ensure sustainable development of Islamic banking in future.
The IFSB was established to promote good regulatory and supervisory practices and uniform prudential standards for Islamic financial institutions. It was envisaged that it will also set and disseminate standards and coreprinciples and adapt existing international standards for regulation and supervision consistent with Shariah principles for voluntary adoption by member countries, the report said.
The harmonisation, while supportive of global financial stability, should be conducive to effective prudential supervision of Islamic financial institutions in their home countries, and facilitate a sustained international expansion of Islamic banking. The development of adequate instruments, markets, and market infrastructure are also factors essential to facilitate risk management and enable Islamic banks to successfully compete with conventional banks in the global financial system, it said.
The report said: in view of these circumstances, it was crucial for the IFSB to play a strategic role as the catalyst for promoting discussion at the international level on a wide array of Islamic banking, financial, and legal matters, encompassing not only technical and regulatory issues, but also broader policy and market development issues.
It said the IFSB should become the centre of competence for designing appropriate solutions to the many challenges that the global markets pose to institutions operating in an Islamic environment as well as for promoting wider acceptance of the standards and good practices necessary to implement these solutions.
It said, in establishing these tasks, the IFSB should get into close partnership with concerned national supervisory authorities and central banks, international financial institutions and relevant market participants.
The report said IFSB could become a key instrument of financial stability and market development for Islamic banking. The IMF with other financial institutions could continue to play a facilitating role by helping promote the goals of IFSB.