National and Global Islamic Financial Architecture:

Prolems and Possible Solutions for the OIC Member Countries

for risk management and capital planning at the bank level and requires higher levels of risk

disclosure to improve market discipline.

IOSCO is a global multilateral organization dealing with regulatory issues related to capital

markets. It published the

Objectives and Principles of Securities Regulation

, also known as the

IOSCO Principles, in 1998 which were then updated in 2010 after the GFC. The document

consists of 38 core principles for the regulation of the securities markets and entails three key

elements: investor protection; ensuring fair, efficient and transparent markets; and the

reduction of systematic risks. The key focus of the IOSCO's core objectives of securities

regulation is on disclosure and transparency (Singh 2013). Similarly, IAIS (2015), an

association of national level insurance regulators, has published various regulatory documents

that include the

Insurance Core Principles

. Updated in 2015, the document has 28 core

principles for the development of a sound and stable insurance industry.

Although the Basel regulatory principles and guidelines should apply to all banks, there are

some additional regulatory requirements for Islamic financial institutions.

This stems from

the use of Islamic financial contracts on both the liability and asset sides. The unique feature of

Shariah

compliance not only introduces risks to Islamic finance that are different from those of

its conventional counterpart but also limits the use of certain risk mitigation instruments and

products from which conventional financial institutions are able to benefit. Thus, governance

and regulation of Islamic financial institutions requires a clear understanding of the risks

arising in Islamic finance and then proposing appropriate measures to mitigate them. The

Islamic Financial Services Board (IFSB), an international standard-setting body for the Islamic

financial industry, has specified standards for Islamic financial institutions that are compatible

with Basel standards.

IFSB is responsible for coming up with regulatory standards for all

three segments of the financial sector and has published various principles, standards,

disclosure requirements and guidance notes for Islamic banking, takaful and Islamic capital

markets.

The regulatory regimes under which Islamic banks are operating can be classified into three

types: Islamic, dual, and conventional. Islamic regulatory regimes are found in Iran and Sudan.

The banking laws and regulatory requirements have adopted Islamic financial transactions as

the only acceptable forms. The dual banking system is one in which both Islamic and

conventional banking services are available. Islamic banking services are provided either by

Islamic banks or through windows in conventional banks, or both. The operation of Islamic

banking in a conventional regulatory regime would require the design of institutions and

Islamic financial products that can operate under the existing laws and regulations. The

regulatory framework of Islamic finance differs from country to country. While in some

countries the same departments or units are responsible for regulating all financial

institutions, in a few countries separate units exist within the regulatory bodies to deal with

the Islamic financial segments of the financial sector.

For a discussion of this, see Chapra and Khan (2000).

As of April 2016, IFSB had 189 members comprising 66 regulatory and supervisory authorities, eight international inter-

governmental organizations and 115 market players, professional firms and industry associations form 48 different

jurisdictions.