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THE CORE PRINCIPLES FOR ISLAMIC FINANCE REGULATIONS AND ASSESSMENT METHODOLOGY

May 2018

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THE CORE PRINCIPLES FOR ISLAMIC FINANCE REGULATIONS AND ASSESSMENT METHODOLOGY

April 6, 2018

Executive Summary

This paper provides a proposal to incorporate the Core Principles for Islamic Finance Regulation (Banking Sector) (CPIFR) issued by the Islamic Financial Services Board (IFSB),1 as part of the standards used in assessing the banking regulatory and supervisory regimes of relevant member jurisdictions under the Financial Sector Assessment Program (FSAP) and the Reports on Observance of Standards and Codes (ROSCs). The CPIFR largely reflects the order of the Basel Core Principles on Effective Banking Supervision (BCP), with five additional principles that are specific to Islamic banking operations. Thus, for countries that have systemically significant Islamic banking sector, the assessment of the banking regulation and supervision regime of the jurisdiction would be against the CPIFR (for fully Islamic banking systems) or BCP and the five additional core principles under the CPIFR (for dual banking systems). The Fund staff is seeking the endorsement of the Executive Board on this proposal.

Approved By

Aditya Narain (MCM), Ross B. Leckow (LEG), and Aasim M. Husain (MCD)

Shamsiah Yunus, Nigel Jenkinson (IMF), and Abayomi Alawode (World Bank) comprising Mohamed Norat (AFR), Nadia Rendak, Julianne Ams, Arz Murr, Chady El Khoury, Elsie Addo Awadzi (LEG), Phil de Imus, Alison Holland, Padamja Khandelwal, Inutu Lukonga (MCD), Rachid Awad, Abdullah Haron, Alejandro Lopez-Mejia, Shamloo Maral and Ghiath Shabsigh (MCM), Artak Harutyunyan and Samah Torchani (STA). Administrative support was provided by Natalia Naryshkina.

Contents

  • Glossary

  • INTRODUCTION

  • OVERVIEW OF THE CPIFR

  • APPLICATION OF THE CPIFR

  • PRINCIPLES SPECIFIC TO ISLAMIC BANKS IN CPIFR

  • A. Treatment of PSIA/IAHs (CPIFR 14)

  • B. Sharī`ah Governance Framework (CPIFR 16)

  • C. Equity Investment Risk (CPIFR 24)

  • D. Rate of Return Risk (CPIFR 26)

  • E. Islamic “Windows” Operations (CPIFR 32)

  • TECHNICAL ASSISTANCE

  • RESOURCE IMPLICATIONS

  • BOX

  • 1. Islamic Finance—Key Principles Governing Islamic Banking

  • APPENDICES

  • I. The Islamic Financial Services Board

  • II. The Fund’s Involvement in Islamic Finance

  • III. Mapping the BCPs and CPIFR Approach

  • IV. List of Countries with Islamic Banking Assets

  • V. Key Unique Risks in IBs

  • VI. Summary of the Unique CPIFR and the Corresponding Methodology

Glossary

AAOIFI

Accounting and Auditing Organization for Islamic Financial Institutions

AC

Additional Criteria

AsDB

Asian Development Bank

AM L/CFT

Anti-Money Laundering and Combating the Financing of Terrorism

BCBS

Basel Committee on Banking Supervision

BCP

Basel Core Principles for Effective Banking Supervision

BOD

Board of Directors

CAGR

Compounded Annual Growth Rate

COI

Cooperating Institution

CPIFR

Core Principles for Islamic Finance Regulation (Banking Sector)

DCR

Displaced Commercial Risk

FATF

Financial Action Task Force

FSAP

Financial Sector Assessment Program

FSB

Financial Stability Board

IAH

Investment Account Holders

IAIS

International Association of Insurance Supervisors

IB

Islamic Banks

IFSB

Islamic Financial Services Board

IIFS

Institutions Offering Islamic Financial Services

ILD

Investment-Linked Deposit

IOSCO

International Organization of Securities Commissions

IRR

Investment Risk Reserve

IsDB

Islamic Development Bank

ML/TF

Money Laundering and Terrorism Financing

PER

Profit Equalization Reserve

PLS

Profit and Loss Sharing

PSIA

Profit Sharing Investment Accounts

RIA

Restricted Investment Account

ROR

Rate of Return

ROSC

Reports on Observance of Standards and Codes

RSA

Regulatory and Supervisory Authorities

RTACs

Regional Technical Assistance Centers

SDG

Sustainable Development Financing Goals

TA

Technical Assistance

UFR

Use of Fund Resources

URIA

Unrestricted Investment Account

Front Matter Page

Press Release No. 18/193

FOR IMMEDIATE RELEASE

Ma 24 2018

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The Core Principles for Islamic Finance Regulations and Assessment Methodology
Author: International Monetary Fund, World Bank, International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. African Dept., International Monetary Fund. Legal Dept., International Monetary Fund. Middle East and Central Asia Dept., and International Monetary Fund. Monetary and Capital Markets Department