Risk Management in
Islamic Financial Instruments
125
and minimizes the central bank’s time and resources on Shariah issues (A Mid-Term Review
29).
6.3 DEVELOPING SUPPORT INFRASTRUCTURE AMONG MUSLIM
COUNTRIES
6.3.1 Legal
Recommendation 8 of the Ten-Year Framework focuses on creating a legal, regulatory and
supervisory framework for the IFSI that will be conducive to growth. Table 6.1 indicates the
ten legal and supervisory areas identified and their progress. The models for the regulatory
bodies vary from country to country. Flexibility of the legal and supervisory frameworks is
necessary, due to the great variety in the size, function, products and operations of the
institutions. As IRTI states, “The laws should provide for tiered regulation, whereby different
institutions would be regulated with different intensities depending on their sizes, functions,
products and operations (38).” Different approaches include creating regulations that vary
depending on the legal format of the institution, or a model where all financial institutions are
treated the same. The KPIs of this recommendation include the percentage of member
countries with tax neutrality and legal enablers of Islamic banking. Adoption of social media
was identified as a second indictor (A Mid-Term Review 107).
Table 6.1: Progress Made in Ten Areas for Legal and Supervisory Enablement
Recommendation Enablement Progress to Date
1. Liquidity support, such as lender of
last resort (LOLR) facilities
Central banks have generally positioned themselves as lenders
of last resort, even in times of crisis, for all banks (both
conventional and Islamic) under their supervision. Whether
the financing to Islamic banks would be undertaken on a
Sharī`ah-compliant basis is often less clear.
2. Neutrality regarding capital
requirements to be accorded to
assets of Islamic banks as
compared to those of conventional
banks
As noted earlier, Islamic banks are generally subject to the
same capital requirements as their conventional counterparts.
The unique attributes of the assets of Islamic banks call for
appropriate risk-weighting. The IFSB standards have covered
this aspect and have been recently updated and enhanced by
IFSB-15 (Revised Capital Adequacy Standard).
3. Sharī`ah-compliant return on bank
reserves held at central banks
Greater focus is required by central banks to provide Sharī`ah-
compliant returns on statutory reserves; only a minority of
member countries do so today.
4. Appropriate treatment of
investment accounts for
mandatory reserves and capital
The IFSB has produced standards on the treatment of
investment accounts.