National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
8
1.1. Financial Architecture: Concept and Background
The notion of a financial architecture was first discussed after the Asian financial crisis of the
late 1990s. As the crisis revealed several weaknesses in the financial systems of afflicted
countries, a group of Finance Ministers and Central Bank Governors met in Washington DC in
1998 to discuss ways in which financial systems could be strengthened nationally and globally
to bring about stability and avoid the recurrence of such crises (BIS 1998). The need for sound
structural, social and macroeconomic policies to bring about not only financial stability but
also promote economic development and poverty eradication were underscored (World Bank
2005). The initiatives that would promote financial stability by preventing and managing crises
were discussed under the framework of the development of International Financial
Architecture (IFA). IFA would include arrangements and actions that would not only
strengthen country level financial systems but also the global level institutions to ensure
stability and facilitate financial integration (World Bank 2005).
There were two key components of the IFA initiative: crisis prevention and crisis mitigation
and resolution. Policies to prevent crises included the ‘development and implementation of
international standards and good practice’ on the one hand and ‘deepening and broadening
surveillance, and intensifying capacity building’ on the other hand (World Bank 2005: 4). The
World Bank and IMF used two key tools to accomplish these goals: first, the Financial Sector
Assessment Program (FSAP) identified the strengths and weaknesses of the national level
financial sectors, and, second, the Reports on Standards and Codes (ROSC) initiative
strengthened the soundness and transparency of institutions, markets and polices related to
the financial system. The ROSC assesses the compliance of national architectural institutions
with international standards in 12 areas including corporate governance, accounting and
auditing, insolvency and creditors’ rights, regulation of banks, insurance and securities
markets, payments and settlements systems, anti-money laundering and financing terrorism,
and transparency of data, fiscal, monetary and financial policies (World Bank 2001 and 2005).
After the global financial crisis of 2007-2008, the FSAP program was reviewed and changes
were introduced (IMF 2014). Changes included adding focus on systemic risks, improving
analytical capabilities to assess vulnerabilities and resilience and improving the quality of the
country level Financial Sector Stability Assessment (FSSA) reports. For developing and
emerging economies, the FSAP would have two broad components, one assessing the financial
stability and the other assessing the financial development. Indicators of financial stability
include not only the soundness of banks and other financial institutions but also the quality of
the supervision of banks, insurance and capital markets against international standards and
the ability of policy makers and financial safety-nets to respond to negative shocks. Financial
development indicators include the quality of the legal framework and the financial
infrastructure in promoting the financial sector that serve all segments of the population (IMF
2015).
WB and IMF (2005:5) identify three pillars of the financial system architecture that can
promote the stability and development of the financial sector. Whereas Pillar I relates to
macro-prudential surveillance and financial stability analysis, Pillar II deals with sound
financial system supervision and regulation. Pillar III involves financial system infrastructure
that include legal infrastructure for finance; systemic liquidity infrastructure; and
transparency, governance and information infrastructure. Some other financial infrastructure
institutions include payments and securities settlement systems; creditors’ rights; the