Ciarb conferenece- Iislamic finance and banking practices- Mohammad Majd Bakir- sessoin 4

Mohammad Majd BakirSenior ManagerAccounting and Governance Standards DevelopmentAAOIFI 31 October 2016

Compatibility Issues and Discrepancies between Islamic

finance modern banking practices and the law: Is the future bright?

Islamic Finance and Banking PracticesReconciling Tradition and Modernity

Kingdom of Bahrain, 31 October 2016

Chartered Institute of Arbitration (CIArb)

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 demand-driven. 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 October 2016

Fatwa and the law: where to draw the line?• According to AAOIFI’s Shari’ah Standard No. 29

(Stipulations and Ethics of Fatwa in the Institutional Framework), Fatwa is “a Shari’ah opinion presented to a person who seeks it with regard to an incidence that has already occurred or is expected to occur. It doesn’t refer to answering queries pertaining to hypothetical incidences”.

• Fatwa is mainly based on Shari’ah 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).


Fatwa and the law: where to draw the line?• Law depends on various sources including

Shari’ah. • Law is mainly based on market practices (Urf),

and practical realities (which may not contradict Shari’ah).

• In matters contradicting Shari’ah, law is submitted to legislative councils for corroboration.


Fatwa and the law: where to draw the line?• Law is developed taking into account technical

opinions, practical matters, in addition to Shari’ah.• 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.


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.


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.


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 Shari’ah rules and precepts [ األباحة المعامالت في .[األصل

• Example: AAOIFI’s accounting standards with respect to impairment, fair value and credit losses [in line with IFRS 9, wherever possible]


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 Shari’ah 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.)


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-à-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-à-vis conventional ones.


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 Shari’ah injunctions and principles that define and shape economic and social fibers, which in turn help set the frame for business, commercial and financial activities.


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 loan-based 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)


Thank You

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

+973 1737 5418Kingdom of [email protected]

www.aaoifi.com


مجد محمدباكير الدين

mailto:[email protected]

http://www.aaoifi.com/

Ciarb conferenece- Iislamic finance and banking practices- Mohammad Majd Bakir- sessoin 4

Economy & Finance