Diversification of Islamic Financial Instruments
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4.5 GLOBAL POLICY RECOMMENDATIONS FOR ALL ISLAMIC FINANCE
DESTINATIONS
Some general policies which need to be adopted by all countries for the development of the
Islamic financial sector are highlighted in this section.
 The legal infrastructure required to develop Islamic finance is essential for any
jurisdiction. It’s not only about creating a wide arching law but countries need to move
towards having specific legal frameworks for each component of the Islamic financial
sector. In addition to the legal framework to support, the legal system needs to be
evolved to provide a level playing field to Islamic finance in comparison to its
conventional counterparts. Some key elements of this legal system can be summarized
in the following observations:
- Separate Islamic Banking, Islamic Capital Markets and Takaful Law to allow for
registering and operations of the companies.
- Taxation law to allow for a level playing field, or preferential treatment to
Islamic financial products to incentivize the market players to move towards
Islamic finance.
- Legal framework for dispute resolution and arbitration. In almost all Islamic
finance jurisdictions there is a need for dispute resolution centers which are
governed by the Islamic law.
- Develop a general Islamic bankruptcy framework for the corporate sector.
 Since Islamic finance has spread out of its traditional Muslim majority countries, the
Islamic financial institutions operate in different legal environments. This has given
rise to more complexity in terms of regulations and overarching law Islamic banking
and finance operates in. There is a further need for ensuring a relevant regulatory
framework for the Islamic financial sector. Islamic Financial Services Board (IFSB) and
AAOIFI are undertaking such efforts, but there is more room for improvement. There
is a lack of regulatory frameworks which can be applied on all components of the
Islamic financial sector. Apart from this, there are differences in regulatory standards
across different countries which need to be bridged for a global effort on the
regulatory aspect of the Islamic financial sector.
 Since Shariah compliance is the unique differentiating factor of Islamic finance, there is
an immediate need for having a global Shariah governance framework to ensure
that the products and operations of Islamic financial institutions do not contradict the
principles of the Shariah. Policy makers need to ensure a sound Shariah governance
framework by making it a legal/regulatory requirement. Specific action plan which can
be undertaken:
- Shariah governance standards and framework should be incorporated in the
Islamic financial law, allowing for similar standards for all financial
institutions.