National and Global Islamic Financial Architecture:

Prolems and Possible Solutions for the OIC Member Countries

institutional capacity of the IFSB. One way to do this is to have separate divisions within the

IFSB dealing with issues related to Islamic banking, takaful and Islamic capital market

segments.

Shariah Governance Framework:

The regulators play a key role in setting up the Shariah

governance regime by providing a framework for Shariah boards for financial institutions. A

national Shariah board would be responsible for issuing Shariah standards/parameters and

promoting the harmonization of practices by ensuring the Shariah compliance of the contracts

used in the industry. Both AAOIFI and IFSB have published Shariah governance standards for

Islamic financial institutions. However, there are no guidelines for national Shariah boards.

Given that national Shariah boards can contribute to the harmonization of practice and the

reduction of costs of Shariah governance in organizations and Shariah compliance risks within

jurisdictions, there is a need to come up with a framework for it. Furthermore, the work on

developing Shariah standards, parameters and templates for Islamic financial products by the

AAOIFI, IsFA and IIFM need to continue to enhance cross-border and international

transactions by reducing legal and Shariah compliance risks.

Liquidity Infrastructure:

A robust liquidity infrastructure consists of appropriate

instruments, efficient and liquid financial markets, and access to LOLR funds from central

banks. There is not only a scarcity of Shariah compliant liquid instruments, but most

jurisdictions also lack deep and efficient Islamic financial markets. While the central bank and

regulatory authorities can help develop the infrastructure for financial markets, the liquidity

instruments can be supplied by both public and private entities. Globally, the secondary

markets for sukuk in most countries are shallow, making them illiquid. IFSB and IIFM can

develop guidelines and templates to strengthen money markets, secondary markets for Islamic

securities, and LOLR facilities for Islamic banks.

Information Infrastructure and Transparency:

To properly reflect the transactions and

operations of Islamic financial institutions, countries can opt for using either AAOIFI

accounting standards or domestic accounting standards adapted by Islamic finance. Other than

the credit ratings provided by conventional rating agencies for debt based transactions, other

types of assessments such as Shariah compliance ratings and providing assessments for equity

modes of financing are also needed for Islamic finance. Globally, there is significant progress

being made towards developing accounting and auditing standards by AAOIFI. Furthermore,

AAOIFI and IFSB have also published disclosure guidelines for the banking and takaful sectors.

There is a need to develop detailed disclosure guidelines for Islamic capital markets and

Shariah compliance of products and securities. Ratings agencies that can assess Shariah

compliance and risks in equity based instruments can further strengthen the information

infrastructure for the industry.

Consumer Protection Architecture:

The study finds the architectural element of consumer

protection to be the weakest for the Islamic financial sector in the countries that were

examined. While instituting appropriate laws and regulations to protect consumers and

deposit insurance have to be implemented by the government and regulators, improving

financial literacy will require effort at different levels. Initiatives at the global level to develop

consumer protection guidelines that cater to the specific features of the Islamic financial sector

and also come up with a framework for financial literacy programs will help their

implementation at the national level. While the former can be done by IFSB, the latter can be

initiated by CIBAFI. To protect Islamic banking depositors during crises would also require