Islamic banks are institutions that conduct banking operations on the basis of Islamic jurisprudence (Sharī’ah). Islamic banks currently operate in more than 60 countries, including in the Middle East and Southeast Asia, Sub-Saharan Africa, and Central Asia, and play an important role in many jurisdictions and regions (see IMF 2017a; Kammer and others 2015). Islamic banking presents an opportunity for many member countries to enhance financial intermediation and inclusion and mobilize funding for economic development.1 In at least 14 jurisdictions, Islamic banks are considered systemic, meaning that their failure could be systemically significant or critical for the financial systems in which they operate, and possibly beyond.2 It is therefore imperative that while jurisdictions embrace Islamic banking and the benefits they potentially provide, they also adopt the necessary measures to promote financial stability.
Robust legal frameworks for the regulation, supervision (including for anti-money laundering/combating the financing of terrorism [AML/CFT]), and resolution of Islamic banks are required in Islamic banking jurisdictions. In many jurisdictions, however, the legal framework governing Islamic banking transactions is unclear, as the rights and obligations of parties to such transactions are not always explicitly provided for in law. In jurisdictions where the Sharī’ah is a dominant or exclusive source of law, Islamic banking transactions may enjoy recognition and enforceability by the courts and supervisory authorities. In other jurisdictions whose legal systems are not fundamentally based on Sharī’ah, however, Islamic banking transactions may be recognized and enforced only to the extent that they can be “precisely and effectively incorporated” into contracts recognizable under secular contract law (McMillen 2004).
Similarly, the accounting principles for Islamic banks are not always clearly spelled out or applied consistently across Islamic banking jurisdictions. Progress has been made, however, toward clarifying the accounting and supervisory principles applicable to Islamic banks. In this regard, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has issued a broad range of accounting, auditing, governance, ethics, and Sharī’ah standards for Islamic banks.3 Also, the Islamic Financial Services Board4 has issued Islamic banking-specific prudential supervisory standards (Core Principles for Islamic Finance Regulation [Banking Segment]), drawing from the Basel Core Principles for bank supervision.5 Islamic banking jurisdictions are at various stages of adoption of these accounting, governance, and supervisory standards (Song and Oosthuizen 2014).
A number of key gaps, however, remain in the framework for promoting financial stability in Islamic banking jurisdictions. These include the absence of legal frameworks for resolving failed Islamic banks and Sharī’ah-compliant lender of last resort facilities and deposit insurance schemes. Another key gap is the absence of AML/CFT requirements and supervision customized for Islamic banks. Very little guidance exists at the international level for designing such legal frameworks. This chapter will discuss, in particular, key issues in the design of legal frameworks for resolution and AML/CFT in the Islamic banking context. It argues that although international standards exist for the design of resolution and AML/CFT regimes for banks in general, more guidance is required at the international level for customizing the existing standards for jurisdictions with Islamic banks, given the unique features of those banks.
Are Islamic Banks Different?
Underlying the proposition that international guidance is needed for Islamic banking-specific legal frameworks for resolution and AML/CFT is the fundamental question of whether Islamic banks are any different from conventional banks. They are indeed different from conventional banks in a number of ways. In particular:
The role of Islamic jurisprudence: Islamic banks are fundamentally defined by a set of Islamic finance principles, which have evolved over the years from the Sharī’ah. These principles prohibit the making or paying of interest income (Riba) or the taking of excessive risks (Gharar), among others, and require transactions to be underpinned by real economic activities and risk-sharing. Historically, a number of schools have emerged in Islamic jurisprudence reflecting variations in methodology, approach, and local conditions. Modern Islamic jurisprudence pertaining to Islamic finance cuts across the traditional schools in an effort to provide (to the extent possible) a harmonized framework of principles that is relevant for modern banking and finance. The need to comply with these principles results in corporate structures, governance structures, balance sheets, and products and services that tend to be different from those of conventional banks, as will be discussed in the text following.
Corporate structures: Islamic banking services are normally provided separately from conventional banking, through dedicated stand-alone Islamic banks or through subsidiaries or windows of conventional banks.6 Conventional banks seeking to provide Islamic banking services often set up windows that are not legally separate from the bank but whose operations are ring-fenced from the conventional banking operations in order to comply with the Sharī’ah prohibition against comingling of Islamic financial operations from non-Islamic ones. From a resolution and an AML/CFT standpoint, Islamic banking windows of conventional banks may present certain unique challenges. Among other things, a different approach may be required to assess the operations, assets, liabilities, and risks of Islamic banking windows—including in relation to the products and services they offer—relative to the conventional banking aspects of the entity.
Governance: Islamic banks have governance structures that differ somewhat from those of conventional banks. In addition to boards of directors and other governance structures used by conventional banks, Islamic banks maintain governance arrangements designed to help promote compliance with applicable Sharī’ah principles. In particular, Islamic banks in many jurisdictions establish Sharī’ah supervisory boards either on a mandatory or voluntary basis.7 These boards consist of Sharī’ah scholars and other professionals (such as economists, accountants, financial sector experts, and lawyers) and have the primary role of advising the institution on the extent of compliance of its activities and operations with relevant Sharī’ah principles. In certain jurisdictions, national or centralized Sharī’ah boards or councils also exist, established as part of the central bank or other supervisory agency or as a stand-alone institution. Sharī’ah supervisory boards and the Sharī’ah compliance role they play for Islamic banks may have implications for the design of institutional arrangements for Islamic bank resolution and AML/ CFT internal controls.
Balance sheets: The balance sheets of Islamic banks tend to be different from those of their conventional peers and are underpinned by transactions structured to comply with Sharī’ah prohibitions against interest and excessive risk-taking. Islamic banking transactions range from interest-free deposits (or loans), sale and purchase agreements on deferred payment terms, leases, fee-based agency agreements, and profit/loss-sharing or loss-bearing agree-ments.8 While in substance the economic effects of these transactions in many cases may be similar to those of conventional banking products, the legal relationships between the Islamic bank and its counterparties may differ significantly from the conventional banking context. For example, Islamic banks often assume the roles of vendor/purchaser, lessor/lessee/hirer, agent, and equity partner, among others, and sometimes directly or through special purpose vehicles. These have implications for the design of frameworks for resolution of failed Islamic banks (for example, how various transactions are ranked in the creditor hierarchy and are otherwise treated in resolution) and pose challenges for AML/CFT supervision.
Nature of certain Islamic banking products: Some products reflect potential complexities and risks for Islamic banks and for the economy at large. There is no evidence that the money laundering/terrorism financing risks in investment banks are any different from those posed by conventional banks. However, very little work has been done by the international community to develop an understanding of the specific money laundering/terrorism financing risks that may be posed by Islamic products. Money launderers and terrorist financiers often use complex products and transactions to conceal the source of the funds or their intended use. Islamic finance products are designed with an asset-based feature to provide for economic intermediation, as opposed to financial intermediation for conventional finance products. This feature introduces a layer of complexity, which may render it more vulnerable to abuse by criminals. Furthermore, Islamic banking products may have substantial effects on macroeconomic stability if not well regulated. Islamic banking contracts tend to be designed with an asset-based feature to provide for economic intermediation, as opposed to financial intermediation for conventional finance products. This feature introduces a layer of complexity given that asset price volatility could impact an Islamic bank’s balance sheets profoundly, whereas distress could lead to fire sales of its holdings in such assets, with implications for the wider economy. Likewise, such asset-based transactions may be more vulnerable to abuse by criminals and can increase the exposure of Islamic banks to risks.
Given these important differences, among others, the direct application of international standards for resolution of failing banks and for AML/CFT cannot be assumed. In the interest of promoting financial stability in Islamic banking jurisdictions, the design of frameworks for bank resolution, and for the design of AML/CFT requirements and supervisory frameworks in the Islamic banking context, should adequately address unique features of Islamic banks and the risks they present.
Legal Frameworks for Resolution of Islamic Banks
International financial law reform efforts following the global financial crisis of 2007–08 have focused, among other things, on promoting global financial stability by strengthening financial safety nets. In many key jurisdictions, the crisis showed that court-based corporate insolvency frameworks were inadequate for addressing systemic bank failures. The absence of legal tools to address bank failure in an orderly fashion led to government bail-outs of failing banks, with severe consequences for fiscal stability, as well as fomenting political resistance in many countries. International reforms have since been undertaken to promote robust legal frameworks for addressing nonviable financial institutions. In particular, the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (“Key Attributes”) represent a nonbinding standard for the design of frameworks for orderly resolution of failing financial institutions (banks and nonbank financial institutions) that could be systemically significant or critical if they fail (Financial Stability Board 2011). It recommends the adoption of legal and institutional frameworks to ensure that banks that are nonviable or likely to be nonviable are resolved by a broad range of administrative powers and tools at an early stage (before balance sheet insolvency) in a manner that promotes financial stability and without exposing taxpayers to losses.9
Although there are as yet no designated global systemically important Islamic banks, some Islamic banks may be of systemic importance in specific jurisdictions or regions, or in some way, connected with systemic financial institutions.10 Islamic bank failures in the past have exposed gaps in the financial safety nets of jurisdictions where they operate.11 Furthermore, the intercon-nectedness between Islamic banks and the conventional banking sector through Islamic banking windows of conventional banks, as well as cross-border operations of Islamic banks, potentially could increase systemic risks from the failure of an Islamic bank.
A critical gap in the global financial stability agenda, however, relates to the lack of guidance for the design of robust Sharī’ah-compliant financial safety nets for Islamic banking jurisdictions. Financial safety nets (in particular, bank resolution frameworks) in many such jurisdictions are not well developed. In particular, whether for conventional banks or Islamic banks, very few of these countries have put in place special bank resolution frameworks, and others have relied on their general corporate insolvency frameworks. To the extent that special bank resolution frameworks have been established, they do not yet distinguish between conventional and Islamic banks, with the one exception of Malaysia’s Islamic Financial Services Act (Act 759) of 2013, which has a resolution framework for Islamic banks. The importance of a well-designed legal framework for Islamic banking resolution cannot be overemphasized, especially given different interpretations of the Sharī’ah by various Islamic schools of jurisprudence, which could have implications for legal certainty in resolution.
In designing Islamic banking-specific resolution frameworks, several key issues would appear relevant. In particular:
Role of Sharī’ah compliance: A fundamental question in the design of Islamic banking resolution frameworks would be the extent to which Sharī’ah law plays a role in the resolution process. In particular, it is important to clarify whether the legal powers, tools, and techniques by which resolution is effected and implemented should be Sharī’ah-compliant. Given that the sanctity and validity of Islamic banking hinges on relevant Sharī’ah jurisprudence, it would appear that a resolution regime for Islamic banks may have to be Sharī’ah-compliant. For this reason, it is important to consider the possible relevance of applicable Sharī’ah jurisprudence in the areas of banking, bankruptcy, insolvency, and market regulation when designing Islamic bank-specific resolution regimes.12
Institutional arrangements for resolution: The legal framework should clearly provide for an administrative authority to resolve failed Islamic banks, such as the supervisory authority, the deposit guarantee scheme operator (if any), or an other relevant agency. Another critical issue is the extent, if any, to which Sharī’ah boards may have a role to play in resolution of investment banks, for example, by assessing whether resolution measures are compliant with relevant Sharī’ah principles, whether on an ex ante or ex post basis. Sharī’ah boards generally help to oversee Sharī’ah compliance by investment banks. There are generally two types of Sharī’ah boards, namely centralized Sharī’ah boards (established by supervisory agencies, for example) which provide guidance on Sharī’ah compliance for all investment banks in a given jurisdiction, and internal Sharī’ah boards that are established by individual investment banks to ensure Sharī’ah compliance. The design of institutional arrangements for Islamic bank resolution may need to avoid potential conflicts that could emerge between a Sharī’ah board and the resolution authority in relation to Sharī’ah compliance of resolution measures. Where a jurisdiction’s legal framework provides a mechanism for judicial review of resolution actions undertaken by the resolution authority, it would be important for the Islamic bank resolution regime to clarify the extent to which the courts may consider whether specific resolution measures were compliant with relevant Sharī’ah jurisprudence.13
Resolution triggers: Triggers for activating resolution powers with respect to Islamic banks should reflect their unique business model. A good legal framework for resolution should provide for clear triggers (such as quantitative and/or qualitative triggers) for initiating resolution of a failing bank. For conventional banks, quantitative triggers largely reflect a “borrowing and lending” business model, with indicators of nonviability that include weak regulatory capital adequacy ratios often impacted by nonperforming loans and other poor-quality assets, and persistent liquidity problems (for example, inability to pay debts as they fall due). In the case of Islamic banks, the application of conventional resolution triggers may be problematic, given differences in their business model, which relies heavily on sales, leasing, and profit/loss-sharing arrangements.
Resolution powers and tools: Islamic bank—specific resolution frameworks should provide explicitly for a broad range of powers to facilitate effective resolution. In line with the Key Attributes, these should include the resolution authority’s powers to (1) replace senior management of the institution; (2) place the institution under official control; (3) impose moratoriums and stays, if necessary; (4) restructure the bank through techniques such as purchase-and-assumption14 or bail-in;15 or (5) liquidate the bank. These powers are expected to be exercised in a manner that achieves key resolution objectives of ensuring the stability of the financial system (in which the bank/group operates) through the preservation of critical functions, protection of depositors, and minimization of losses to taxpayers. While some resolution powers (for example, forced mergers or forced recapitalization) appear not to violate relevant Islamic finance principles, others such as purchase-and-assumption and bail-in powers may require more legal clarity from an Islamic banking perspective. In any event, the lack of sufficient legal clarity may have consequences for the choice of resolution strategy in a given case.
With respect to purchase-and-assumption, the legal framework for Islamic bank resolution may need to clarify key issues, such as which transactions (including profit-sharing investment accounts) are classified as assets or liabilities for purposes of transfer to an acquiring institution. More fundamentally, it is unclear whether the Sharī’ah prohibition against the sale of debt in return for interest (ribd) could make purchase-and-assumption transactions for Islamic banks challenging. This is because the sale of certain Islamic bank assets (for example, receivables from leasing or sales agreements) or liabilities below face value would imply a discount, which could be interpreted as “interest” and therefore possibly barred by the Sharī’ah. Furthermore, the purchaser of a troubled bank’s assets and liabilities would likely include certification of its operations as Sharī’ah-compliant, which could delay finding a suitable acquirer (especially in jurisdictions with small investment bank sectors). To mitigate this risk, it may be possible in appropriate cases for authorities of a given jurisdiction to establish and license a Sharī’ah-compliant bridge bank to acquire assets and liabilities of the failed institution in a timely fashion.
The extent to which bail-in powers could be applied in the resolution of Islamic banks will also need to be clarified in legal frameworks. Among other things, the legal treatment of a transaction—in particular, whether it is held as a client asset or as a liability of the bank, and if as a liability, whether secured or unsecured—has implications for its ability to be bailed-in. For example, funds standing to the credit of depositors under profit-sharing investment accounts may be treated as risk-bearing client assets in some jurisdictions. Turkey and other jurisdictions, however, insure such funds under deposit insurance schemes, and as a result, these funds could be deemed not appropriate for bail-in, given that they are guaranteed to an extent. More fundamentally, it would appear that the concept of debt write-down and the “no debt forgiveness” principle may be inconsistent with relevant Sharī’ah prohibitions. The concept of debt write-downs under bail-in assumes mandatory forgiveness of the portion of the debt written-off, which is forbidden under Sharī’ah. Similarly, where bail-in is to be carried out through an equity-to-debt conversion, the “no debt forgiveness” Sharī’ah principle may be relevant. An equity-debt conversion that recognizes debt at par value may in principle not be a problem under Sharī’ah law. In addressing these issues from a statutory standpoint, jurisdictions could also clarify possibilities for Sharī’ah-compliant bailins, perhaps through contractual arrangements.
These questions and issues need to be addressed explictly by Islamic banking jurisdictions. In the design of resolution regimes, jurisdictions are faced with key choices. Whether or not the general legal framework of a jurisdiction recognizes Sharī’ah law, there may be practical challenges in applying conventional resolution regimes to Islamic banks, given the issues discussed previously. A clear legal framework for resolving Islamic banks that addresses key issues such as those discussed in this chapter, would be useful for promoting financial stability through orderly and speedy resolution with legal certainty.
AML/CFT Legal Frameworks for Islamic Banks
There is no evidence that the money laundering and terrorism financing risks in Islamic banks are any different from those posed by conventional banks. Rather, the choice of conventional bank or Islamic bank to launder the proceeds of crimes or finance terrorism would appear to be dictated by convenience and opportunity, rather than by any inherent differences between them. However, very little work has been done by the international community to develop an understanding of the specific money-laundering and terrorism-financing risks that may be posed by Islamic banks or to determine whether modifications need to be made to Financial Action Task Force (FATF) standards to address them (Financial Action Task Force 2012).
Banks (both conventional and Islamic) are vulnerable to abuse by money launderers and terrorist financiers. Criminal activities, such as drug trafficking, smuggling, human trafficking, and corruption, tend to generate large amounts of proceeds. To mitigate the risk of misuse by money launderers or terrorist financiers, it is essential that banks adopt and implement adequate controls and procedures that enable them to know the person(s) with whom they are dealing. Adequate customer due diligence on new and existing customers is a key part of such controls.
The FATF standards on AML/CFT place customer due diligence and other so-called preventive measures at the heart of an effective AML/CFT framework. Effective customer due diligence requires (1) the verified identification of a customer and/or beneficial owner; (2) an understanding and, if appropriate, the collection of information on the purpose and intended nature of the business relationship and the source of the funds; and (3) the ongoing monitoring of the business relationship. These requirements are designed to ensure that financial institutions know on whose behalf they are holding funds or conducting transactions, and to identify any potential suspicious activity. Where appropriate, financial institutions are required to report suspicious transactions to the competent authorities. Financial institutions’ AML/CFT programs consist of internal policies, procedures and controls (including appropriate compliance management arrangements), and adequate screening procedures for hiring employees.
The FATF standards were developed mainly with the conventional financial sector in mind. They do not make special provision for Islamic banking. Most countries with an Islamic banking presence have put in place AML/CFT regimes that are based on the FATF standards. Legislators and regulators in those countries have imposed the same requirements to identify and verify the identity of clients and beneficial owners, conduct due diligence to verify the source of funds, and report suspicious transactions.
However, some features of the FATF standards would not appear to fully take into account the specific features of Islamic banks. For instance, the definition of a “financial institution,” included in the glossary of the FATF Recommendations, does not encompass comprehensively the reality of Islamic financial institutions. Financial institutions are defined as natural or legal persons conducting one or more financial activities (for example, deposits and lending) listed in the glossary, which does not seem to incorporate the variety of existing Islamic banking products and services. Moreover, the glossary defines a financial institution as acting for or on behalf of a customer, whereas Islamic banks engage for or on behalf of partners.
In addition to the divergence of definitions, there has been very little study of the potential money-laundering and terrorism-financing risks arising from Islamic banking. While these risks in conventional financial sector activities have been the subject of numerous studies and publications on methods, trends, and typologies prepared by FATF and FATF-style regional bodies and their members, there are no corresponding studies in the field of Islamic banking. No money laundering and terrorism financing typologies or indicators related to Islamic banking have been published by AML/CFT national concerned agencies or standard setters, and there is no common understanding of the typologies and techniques used for money laundering and terrorism financing in Islamic banks. Identifying the main typologies would facilitate raising the private sector’s attention to the techniques most commonly used by criminals in Islamic finance and would enable relevant governmental agencies to identify the areas of greater money-laundering and terrorism-financing risks and take appropriate mitigating measures.
In particular, some specific features of Islamic banking could present vulnerabilities that require a different approach in the design of AML/CFT regimes. Areas that merit further study include, for instance, the specific nature of the relationship between a financial institution and its customers, the management of the high volume of Zakat16 by investment banks, and the complexity of certain transactions and products. Islamic products require that the financing provided is asset-based, often resulting in the purchasing, ownership, transfer, and transactions of real goods between counterparties. The result is a complex layering of transactions and the involvement of third parties in order to be Sharī’ah-compliant. This can create opportunity for launderers to use those products to conceal the proceeds of crimes without detection.
Conclusion
The chapter has argued that Islamic banking jurisdictions need to explore the benefits of adopting Islamic banking—specific resolution and AML/CFT frameworks. At a minimum, jurisdictions must clarify what resolution toolkits they have in place to tackle Islamic banking failure in an orderly manner to preserve financial stability and to protect taxpayers from losses. Similarly, jurisdictions must adopt AML/CFT requirements and supervisory approaches that are specific to the unique features and risks of Islamic banks.
Gaps in the international regulatory framework for bank resolution and AML/ CFT as they relate to Islamic banks should be addressed. Further analytical work on the potential complexities and uncertainties identified in this chapter should be undertaken by relevant international bodies, in close consultation with other standards setters. This effort should help to customize conventional standards in these areas for application to Islamic banks.
References
Addo Awadzi, Elsie, Carine Chartouni, and Mario Tamez. 2015. “Resolution Frameworks for Islamic Banks.” IMF Working Paper 15/247, International Monetary Fund, Washington, DC.
Accounting and Auditing Organization for Islamic Financial Institutions. n.d. “Governance Standards on Sharī’ah Supervision and Compliance.” http://aaoifi.com/?lang=en.
Financial Action Task Force. 2012. “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations.” http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATFRecommendations.pdf.
Financial Stability Board. 2011 (updated 2014). “Key Attributes of Effective Resolution Regimes for Financial Institutions.” http://www.fsb.org/wp-content/uploads/r141015.pdf.
Financial Stability Board. 2017. “2017 List of Systemically Important Banks (G-SIBs).” http://www.fsb.org/wp-content/uploads/P211117-1.pdf.
Islamic Finance Services Board. 2009. “Guiding Principles on Sharī’ah Governance Systems for Institutions Offering Islamic Financial Services.” http://www.ifsb.org/standard/IFSB-10%20Shariah%20Governance.pdf.
International Monetary Fund (IMF). 2017a. “Ensuring Financial Stability in Countries with Islamic Banking.” IMF Policy Paper, International Monetary Fund, Washington, DC.
International Monetary Fund (IMF). 2017b. “Ensuring Financial Stability in Countries with Islamic Banking—Case Studies.” IMF Multi-Country Report 17/145, International Monetary Fund, Washington, DC.
Kammer, Alfred, Mohamed Norat, Marco Piñón, Ananthakrishnan Prasad, Christopher Towe, Zeine Zeidane, and an IMF staff team. 2015. “Islamic Finance: Opportunities, Challenges, and Policy Options.” IMF Staff Discussion Note 15/05, International Monetary Fund, Washington, DC.
Kyriakos-Saad, Nadim, Manuel Vasquez, Chady El Khoury, and Arz El Murr. 2016. “Islamic Finance and Anti-Money Laundering and Combating the Financing of Terrorism.” IMF Working Paper 16/42, International Monetary Fund, Washington, DC.
McMillen, Michael J. T. 2004. “Enforceable in Accordance with its Terms: A Proposal Pertaining to Islamic Sharī’ah.” Presentation at the Islamic Financial Services Board meeting in Bali, Indonesia.
McMillen, Michael J. T.. 2012. “An Introduction to Sharī’ah Considerations in Bankruptcy and Insolvency Contexts and Islamic Finance’s First Bankruptcy (East Cameron).” https://papers.ssrn.com/sol3/papers.cfm?abstractid=1826246.
Song, Inwon, and Carel Oosthuizen. 2014. “Islamic Banking Regulation and Supervision: Survey Results and Challenges.” IMF Working Paper 14/220, International Monetary Fund, Washington, DC.
Islamic banking benefits potentially include increased financial market depth and financial inclusion, and increased funding for economic development. However, the growth of Islamic banking and its complexities pose new challenges and unique risks for regulatory and supervisory authorities. See IMF 2017b.
Consistent with the definition in the Islamic Financial Stability Board’s “Financial Stability Report, 2016,” Islamic banking is classified as systemically important if it accounts for 15 percent or more of the domestic banking system assets. Relevant jurisdictions include Bangladesh, Brunei, Iran, Kuwait, Malaysia, Qatar, Saudi Arabia, Sudan, United Arab Emirates, and Yemen.
AAOIFI was established in 1991 in Bahrain to supplement international accounting and auditing standards by developing, interpreting, and disseminating accounting and auditing standards for Islamic financial institutions. AAOIFI currently has 200 members from 45 countries, including central banks, financial institutions, and other participants from the international investment bank and finance industry. See http://www.aaoifi.com/aaoifi/TheOrganization/Overview/tabid/62/language/en-US/Default.aspx.
Established in 2002 and based in Kuala Lumpur, Malaysia, the Islamic Financial Services Board currently has 188 members, including regulatory and supervisory authorities, international organizations, and market players. See Islamic Financial Services Board, “List of Members: By Category,” http://www.ifsb.org/membership.php?id=1.
Issued by the Basel Committee on Banking Supervision.
The choice of stand-alone Islamic banking subsidiaries or windows are often shaped by legal, regulatory, and tax considerations in a given jurisdiction, among others (IMF 2017a).
The Sharī’ah governance framework also includes internal control, external audit, and reporting functions, which form the basis of the Sharī’ah board to stakeholders. See Accounting and Auditing Organization for Islamic Financial Institutions n.d.; and Islamic Financial Services Board 2009.
The most commonly used Islamic banking contracts include profit-sharing investment accounts, muddrabah, mushdrakah, Ijara (lease), wakala (agency-type), or Sukūk (trust certificates).
The Key Attributes provide for a broad set of resolution powers and techniques to be made available to resolution authorities to undertake mandatory recapitalization, forced mergers, debt restructuring through bail-in, purchase and assumption, and transfers of assets and liabilities to bridge banks.
The Financial Stability Board’s list of global systemically important banks, as of November 2017, included 30 global banks. While none of these is an Islamic bank, it is possible that at least some of them may have Islamic banking windows or subsidiaries. See Financial Stability Board 2017.
The failure of Ihlas Finance in 2001 and the subsequent run on Islamic bank deposits in Turkey during the Turkish financial crisis is a case in point. Other examples include the near-failure of Dubai Islamic Bank and Noor Islamic Bank of Dubai, the Kuwait Finance House, the al-Rajhi Bank of Saudi Arabia, and the Islamic al-Hilal Bank of Abu Dhabi. More recently, the failure of Kenya’s Chase Bank—a conventional bank with an Islamic banking window—exposed the complexities of supervising and resolving conventional banks with such windows.
For a discussion on the application of insolvency proceedings in the Islamic finance context, see McMillen 2012.
In the context of resolution, judicial review aims to ensure, in general, that the resolution authority has acted within its legal authority and followed due process. The Key Attributes call for resolution regimes that do not constrain the implementation of, or result in a reversal of, measures taken by resolution authorities acting within their legal powers and in good faith. In an Islamic banking resolution context, there could perhaps be a valid question as to whether a resolution authority taking measures that do not respect relevant Sharī’ah jurisprudence could be said to have acted within their legal powers.
In a purchase-and-assumption transaction, the resolution authority transfers the assets and liabilities of a troubled Islamic bank to a healthy acquirer (or bridge bank) without the consent of existing shareholders or creditors of the troubled bank.
Bail-in, as contemplated by Key Attribute 3.5, involves the mandatory write-down or conversion of debt, equity, and other capital instruments of a bank in resolution to help stabilize the bank and to allocate losses among shareholders and unsecured and uninsured creditors.
Under the Sharī’ah, Zakat is intended to be a poverty reduction, income redistribution, and stabilization scheme. It is levied on those individuals whose wealth is beyond a certain exempted allowance. The wealth used for Zakat purposes is broadly defined and includes cash, precious metals (for example, gold and silver), animal stock (for example, camels, sheep, and cows), and agricultural produce (for example, wheat, barley, dates, and grapes).