National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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One finding from empirical studies that is relevant to Islamic finance is the distinction between
investors and consumers among retail clients (IFSB 2015: 96). While the retail investor
interacts with the different segments of the financial sector and makes appropriate risk-return
decisions, the consumer has little knowledge and experience of the financial markets. The
appropriate policy for the former would be to have more disclosure and for the latter to have
protection against misspelling and the improvement of their financial literacy. IFSB (2015)
identifies several key instruments for protecting financial consumers. Firstly is empowering
customers so that they can make better informed choices. This can be accomplished by, among
other things, requiring disclosure of relevant information by financial institutions, providing
consumer awareness and education programs, and having consumer advice institutions.
Secondly is establishing a sound regulatory and supervisory framework that can ensure good
practices and the fair treatment of financial consumers. This can be done through product and
conduct regulations. Thirdly is instituting an efficient complaints handling and dispute
resolution framework that addresses the concerns of clients effectively and treats consumers
fairly (IFSB 2015, 96-98). Finally, there must be a deposit protection scheme for customers
when financial institutions fail and close down.
Financial education programs are important tools for empowering consumers on the demand
side. There is a need to introduce financial literacy schemes at different levels to reduce the
information asymmetry so that consumers can make more informed decisions. Consumers
who are financially literate can not only make better financial decisions but also facilitate the
smooth functioning of financial markets (World Bank 2015). This is particularly true as
financial products have become more complex and the risks in products are difficult to
understand (Lukonga 2015: 6). Financial literacy forms an important part of the regulatory
response to protect consumers in the aftermath of the GFC. World Bank (2012) considers
financial literacy as a tool for consumer empowerment and protection. Although the financial
regulator can take the lead in this, different government and non-government organizations
should be involved in developing and implementing financial education and literacy programs
by using a range of initiatives and channels such as publications, webpages, television, radio
and mass-media. A sound financial education framework will target all segments of the
population including schoolchildren, the youth, and the community at large. OECD (2012)
came up with OECD/INFE High-Level Principles on National Strategies for Financial Education in
2012 and National Strategies for Financial Education in 2015, providing a detailed framework
to promote financial education globally.
While studies show that the general level of financial literacy among financial consumers is
low, literacy issues for the Islamic financial sector become even more challenging as the
industry is relatively new and there is a lack of awareness of its principles among the general
public. Islamic financial modes of financing and products are diverse with each having their
own unique features which add to their complexities. The result is that there is a low level
understanding of Islamic financial products even among the educated and elite (Lukonga 2015:
27).
3.6.2. Deposit Insurance
As a part of the regulatory regime, protection of the assets of depositors when banks cease to
operate is an important component of the consumer protection framework and for ensuring
financial stability. Deposit insurance schemes act as a financial system safety-net when
financial institutions shut down and also help prevent systemic risks (IFSB 2015: 100). Deposit