Many jurisdictions including most Muslim countries do not have the requisite let alone a basic regulatory and legal infrastructure for facilitating Islamic banking and finance. Does the IFSB have a program to create regulator awareness in this respect?
In simple terms the IFSB approach to prudential and supervisory regulation is cross-sectoral which I first espoused in 2003 at a meeting during the World Bank/IMF Group meetings in Dubai in 2003. The IFSB definitely has regulator awareness programs in place. The board has developed strategies for the facilitation and the implementation of its standards. The IFSB conducts several in-depth workshops on standards and issues in various countries on a regular basis. It has trained over 1,600 officials in many jurisdictions. The latest one was Djibouti in French even though the official language of the board is English. IFSB standards are published in English, but it also has translations in Arabic. By developing these standards, the IFSB demonstrates that they are still within Basel II provisions but at the same time cater for the specificities of Islamic finance. The board also makes a major contribution to creating awareness through its various specialized platforms, such as the Islamic Financial Stability Forum (IFSF). The aim is to get the governors of central banks and monetary authority officials involved. The first meeting of the IFSF was held in Khartoum, followed by one in Jeddah, and the last one in March earlier this year where the important issue of liquidity management in Islamic finance was discussed. The IFSF learns from and cooperates with the International Financial Stability Forum of the International Monetary Fund.
 
Is there not a danger that member countries and institutions can become overwhelmed with the new terminology of the international financial system - stress testing, early warning system, contingent capital, quantitative easing and so on?
If you don't cater for these specificities you can trigger systemic risk. This is a real danger.
 
Has the IFSB not neglected two important constituencies - policy makers (Treasuries and Ministries of Finance) and legislatures?
Every standard drafted by the IFSB has to be approved by its full higher council. Even with the Basel standards you don't have enforcement, but they are recommended for adoption. It is better we don't have legal enforcement of standards because we try to produce a high quality standard. If you have legal enforcement sometimes you get complacency. The IFSB has a robust due process and consultation period which lasts for six months robust starting with the drafting of the standard, then a draft exposure with public meetings, before the final standards is adopted. We also have workshops all over the world to discuss the complexities of standards.
 
But how does the IFSB get the policy makers to adopt its standards. They are the political masters of the central banks and regulators?
The IFSB's mandate is with the central bankers. It is up to them to fight that battle with their policy makers. The IFSB cannot go beyond its mandate, which says that the board has to produce prudential and supervisory standards for the Islamic financial services industry.
 
The first line of defense in any financial jurisdiction is the enabling legislation authorizing banks and other types of financial institutions. There is no universal model for Islamic banks. Why hasn't the IFSB introduced a standard for this?
It is simple, because legislation is not within the purview of the IFSB. The board deals with prudential and supervisory standards only. However, it has identified legal risk. It has held about seven seminars on this topic. Let us go back to basics. A Shariah committee can approve a contract which it certifies as 100 percent Shariah-compliant. The bank is happy and goes to implement the contract. The minute there is a dispute, the legal risk come back. It happened in Malaysia. The central back acted quickly; went to Parliament and said that the laws stipulated that if something like that happens the judge has to consult the National Shariah Council at the central bank. Admittedly, it changes from one jurisdiction to another. But this is not an IFSB issue. IFSB only issues prudential and supervisory standards. There are countries that aspire to become Islamic financial centers. As a requirement they have to polish their legislative structures. That is market forces. If a bank wants to come to a financial center which is heavily promoted, it will look at the requisite prudential, regulatory and legal infrastructure, and decide whether this is up to scratch.
 
Is there not a case to extend the IFSB mandate to incorporate the legal standards or authorization model? For instance, Bosna International Bank in Sarajevo and Arab Albanian Islamic Bank in Tirana were established, and neither jurisdictions did not even have a law in place approving the basic Murabaha contract.
While I take your point, the IFSB is not in a position to extend its mandate to beyond regulatory and supervisory matters. Does the Basel Committee talk about introducing laws? The IFSB deals with central banks and financial regulators who in turn deal with prudential and supervisory matters. Other entities deal with legislative and legal aspects.
 
So we really need another organization to promote this in Islamic banking?
I don't think this will be feasible because we are dealing with sovereign issues. It is a national issue. Banks don't operate in a vacuum but within a legal infrastructure, the banks themselves have to lobby for that in their own jurisdictions. Why did the UK amend part of its legislation to attract Islamic finance? It was because of financial inclusion policies and not because it was imposed by someone from outside. There has to be a national law. Standards can come from organizations. But legislation has to be market or jurisdiction driven. The IFSB has been creating awareness about this - workshops, legal risk seminars etc. It even issued a book on Global Legal Issues in Islamic finance. The IFSB has been among the first to speak about securitization, trust and insolvency laws. It even had a seminar in conjunction with the IMF/World Bank during the group's annual meeting last October on insolvencies. The board has created awareness but it cannot go beyond that. It also organizes public lectures where it invites eminent people to speak including the likes of Yves Mersch, governor of Banque centrale de Luxembourg.
 
Is there any unfinished business at the IFSB?
I think there is. Reaching new members and constituencies, and meeting new challenges are just some of them.
 
Takaful and deposit insurance are two major challenges?
The IFSB has issued a number of standards on Takaful. The latest one was in March 2011 - Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions (ECAIs) on Takaful and ReTakaful Undertakings (GN-5). There is also Standard 11 on solvency requirements for Takâful (Islamic Insurance) undertakings and standard 8 - guiding principles on governance for Takâful (Islamic Insurance) undertakings. Only two countries currently have Shariah-compliant deposit insurance schemes - Malaysia and Turkey. The IFSB was on the point of cooperating with Malaysia, with the aim of creating awareness about this scheme. We have to do this. The awareness problem with IFSB countries is all about regulatory issues. That is the process. The IFSB is getting more members which are deposit insurance agencies. Therefore it has to cater for their needs.
 
Do you see the IILM as the overriding institution as the market maker for liquidity management or cooperating in tandem with government institutions?
The establishment in October 2010 of the International Islamic Liquidity Management Corporation (IILM) is the second time where regulators have joined together in the interests of the Islamic finance industry. The challenge is that there are currently only two AAA rated members of the IFSB - Singapore and the Islamic Development Bank (IDB). So there are not enough AAA-rated issuers. The key aspect was rating arbitrage, and if you couple that with the chronic liquidity management problem within the Islamic finance industry you are solving dual issues - liquidity management on the one side and capital markets on the other side. (Rating arbitrage often refers to taking advantage of the difference between an asset's risk level indicated by its credit rating and the actual amount of risk.) That is what the IILM is all about to issue AAA-rated papers for cross-border liquidity management and to develop an international Islamic capital market. To do that, any institution would have to have the credibility of the central banks because liquidity management is at the heart of central banks. But multilaterals and sovereign wealth funds can also play a bigger role. For instance the sukuk could be based against sovereign and corporate assets but they have to come through their respective central banks. The IILM will develop as the supply of requisite assets, come to the fore. The sukuk issued by the IILM could play a crucial role where capital and other reserves of Islamic banks can be parked especially in jurisdictions - both Muslim and non-Muslim - where the central banks do not have such Shariah-compliant liquidity management instruments.
 
Is the IFSB vindicated when the Qatar Central Bank recently stipulated that it is merely following the standard and guidelines of the board when it issued a directive requiring the Islamic banking windows of conventional banks to close their operations by the end of 2011?
That is a decision of the Qatar Central Bank. The IFSB only supports the implementation of its standards. That decision is the sole prerogative of the Qatar Central Bank. Every central bank has the right to introduce whatever measures it sees fit. The IFSB does not interfere in that process. We are not mandated to interfere in the internal decisions of members. They must have their own reasons for such an action.
 
What about your successor at IFSB?
Jaseem Ahmed comes from an experienced background and from a good institution - the Asian Development Bank which is a member of the IFSB. He has been heavily involved in the senior IFSB committees especially on the technical side. His appointment came after a very thorough selection process after he was nominated by his home country, Bangladesh. There were several other candidates.
 
What is life after the IFSB for Rifaat Abdel Karim?
Honestly, I cannot comment on that. I have spent 13 years with AAOIFI (the Accounting and Auditing Organization for Islamic Financial Institutions) and 8 years with the IFSB. That is a lot. I need a break.