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Chartered Institute of Arbitration (CIArb)

Islamic Finance and Banking


Practices
Reconciling Tradition and Modernity
Kingdom of Bahrain, 31 October 2016

Compatibility Issues
and Discrepancies between
Islamic finance modern
Mohammad Majd Bakir
banking practices and the
Senior Manager
law: Is the future bright?
Accounting and Governance Standards
Development

31 October 2016

The role of the general public in Islamic finance and


banking industry.

The general public:


Providers of funds (depositors, investors, etc.)
Users of funds (borrowers).
At inception, Islamic finance was initially demanddriven. Demand is still and will always be driven by
religious-conscience people.
Additional demand comes from non-Muslims for
risk/reward considerations.
Emerging requirements of the general public help
spur innovation as bankers attempt to cope with
demand and withstand competition from
conventional institutions.

MMB, AAOIFI, 31

Fatwa and the law: where to


draw the line?

According to AAOIFIs Shariah Standard No. 29


(Stipulations and Ethics of Fatwa in the Institutional
Framework), Fatwa is a Shariah opinion presented
to a person who seeks it with regard to an
incidence that has already occurred or is expected
to occur. It doesnt refer to answering queries
pertaining to hypothetical incidences.
Fatwa is mainly based on Shariah sources, in
addition to judgment of the Mufti, Istihsan and
Maslaha Mursalah.
At the level of IFIs and Islamic finance, Fatwa is
confined to operational rulings and relevant issues
(mainly permissibility vs. impermissibility).
MMB, AAOIFI, 31

Fatwa and the law: where to


draw the line?

Law depends on various sources


including Shariah.
Law is mainly based on market
practices (Urf), and practical realities
(which may not contradict Shariah).
In matters contradicting Shariah, law is
submitted to legislative councils for
corroboration.

MMB, AAOIFI, 31

Fatwa and the law: where to


draw the line?

Law is developed taking into account technical


opinions, practical matters, in addition to
Shariah.
Fatwa relates to specific issues. Law governs
areas such as banking,
Law aims to regulate an area within jurisdiction.
Law is normative and mostly addresses
administrative procedures, while Fatwa tackles a
specific incidence or question faced by the
institutions in their day-to-day operations.

MMB, AAOIFI, 31

Are Islamic finance and banking practices uniform?

Simply, not to the desired or expected level.


Different, and at times contradicting,
practices across countries are still
observable.
Here comes the role of standards (AAOIFI
Standards), that have created an advanced
degree of harmonization and
standardization in the global industry.
But, more efforts need to be exerted at
several levels.

MMB, AAOIFI, 31

Islamic Finance Regulations and Guidelines: Soft and Hard Law(s)

Regulations and guidelines are part of


the overall framework.
Guidelines help explain the application
of regulations.
They are tools for regulatory and
supervisory bodies.
Enforcement by a regulatory body
determines whether such regulations
are deemed soft or hard.
MMB, AAOIFI, 31

Is there an ethical clash between Islamic finance


practices and the standard banking systems?

It is not a clash. Rather, Islamic finance


operates within a broader financial
system, taking into consideration best
practices and tools, wherever possible and
without compromise on Shariah rules and
precepts [] .
Example: AAOIFIs accounting standards
with respect to impairment, fair value and
credit losses [in line with IFRS 9, wherever
possible]
MMB, AAOIFI, 31

The role of women in Islamic


finance and banking practices.
Women are part of the public who are
consumers of Islamic financial products and
providers of funds.
Women are professionals who work to deliver
these products to the market.
Women can play a role on Shariah Boards and
similar bodies. There are prime examples.
Banks and IFIs can develop women-focused
financial products and services to cater their
needs (insurance, wealth consultation, capital
protected products, dedicated branches, etc.)

MMB, AAOIFI, 31

Basel and Islamic finance: latest


developments

Individually, IFIs do not pose significant levels of


systemic risk.
Capital structure is mostly Tier-1 (common equity).
Tier-2: e.g., subordinated sukuk.
Capital adequacy is considerably higher than that of
conventional banks.
Leverage risk and contingent risk are not a major issue
to reckon with.
Lower costs of compliance vis--vis conventional ones.
Basel III requires banks to hold more capital.
Basel III may create an opportunity for Islamic banks to
solidify their position vis--vis conventional ones.

MMB, AAOIFI, 31

Is Islamic finance and banking


system sustainable?
This system has its logic and underpinnings
which are reflected in a comprehensive Islamic
economic system: allocation of resources,
production, and exchange of goods and services,
and distribution of wealth and economic benefits.
Its framework is well conceptualized, coherent,
and integrated, all under Shariah injunctions and
principles that define and shape economic and
social fibers, which in turn help set the frame for
business, commercial and financial activities.

MMB, AAOIFI, 31

Is Islamic finance and banking


system sustainable?
As discussed in Session 1, this system is backed
by a solid foundation: principles of contracts,
rights and obligations of contracting parties.
Profit-sharing and variability of return, and risk
sharing. This confers flexibility and ability to
innovate on IFIs, rather than confining to loanbased arrangement as conventional banks do.
Islamic finance provides prudent financing
options (asset backed or equity based).
Enforcement draws on ideology and faith (in line
with broader ethical values)
MMB, AAOIFI, 31

Thank You
Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI)
+973 1737 5418
Kingdom of Bahrain
mbakir@aaoifi.com
www.aaoifi.com

MMB, AAOIFI, 31