Supervisory Implications Of Islamic Finance

In The Current Regulatory Environment

ILYAN ANINA BINTI IZANI BG11110201
FATIMAH BINTI BANGGULU BG11110173
NORANISA BINTI ISMAIL BG11110378
NUR AFIQAH BINTI JAMIRIN BG11110386
NURFATIN NATASHA BINTI ZAINUDDIN BG11110420
SITI NABILAH BINTI AZIZ BG11110497
ZETTY AKHTAR BINTI ZAKARIA BG11110591

INTRODUCTION
To address the fundamental question of how these
issues can be addressed within the current
regulatory environment.
The
supervisory
implication of
regulating
Islamic Finance
Regulation in a wholly
Islamic jurisdiction.
Regulation of both Islamic
and conventional finance.
Regulation of both
Islamic and
conventional finance.
Whether a single regulator can
regulate both conventional and
Islamic Finance
Whether it is possible for a single
integrated regulatory approach or
regime to apply to both
conventional and Islamic Finance
Greatest challenges faced
by regulators
Aligning the international standards adopted across the global
financial system with the fragmented standards and practices
Islamic finance face their own share of concerns
The role of a
regulator
Develop regulatory objectives
For example: customer
protection-greater disclosure
Provide tangible
regulatory
measurements
Find appropriate
regulatory
environment for
Islamic finance from
others conventional
finance
Islamic finance make
adaptation from
conventional finance
which is based on shariah
compliance:
Riba free financing
Profit loss sharing
Lower level risk
The Regulatory Position In Relation To
Shariaah
Issues in Shariah Committees/Boards
> Limited number of
Shariah scholars
~ Sufficiently in both Shariah
and finance
~ Raise regulatory concerns
of conflict of interest
~ May delay the introduction
of new products or services
> Roles and
responsibilities of
Shariah
commities/boards
~ clear understanding of
the role and influence
~ role of AAOIFI

>Significance of role of
Shariah
committees/boards
~ Should perform a review
of the Islamic firm
~ Would a regulatory have
the requisite powers or
regulatory tools to take
action?
The Regulatory Challenge: Addressing
The Unique Risks In Islamic Finance
a. Shariah-compliant Risk Mitigation
b. Legal and Prudential Risks
c. Product Definition
d. Shariah Non-Compliance Risks
a. Shariah-compliant Risk Mitigation
The same risk mitigates are not always available to Islamic firms.
Limited availability of Shariah Compliant - resulting in identified but
unaddressed risks.

b. Legal and Prudential Risks
Prudential risks may rise in murabahah where the customer is not
bound to take possession of underlying assets.
Profit-sharing investment accounts (PSIA) pose prudential risks
which have two unique risk which are :-
- Fiduciary risk
- Displaced commercial risk (DCR)
c. Product Definition
Regulators having difficulty on provide the most suitable regulatory
framework sometimes.
The risks may manifest themselves at different stages of a transaction.

d. Shariah Non-Compliance Risks
Some regulators have to find solution trough the implementation of
adequate systems and controls that ensure compliance with Shariah.
Every regulatory structure need to have adequate enforcement
powers.
Role of regulator to play in respect of such issues in Islamic finance
It is not desirable of financial services regulator to opine on question
of Shariah.


The AAIOFI has provided some direction on the approach to Islamic
windows, primarily in relation to segregation of accounts, Shari'ah
requirements and specific disclosure.
Windows operations
Challanges Find the most consistent regulatory framework
for Islamic windows.
Critism
Islamic window cannot truly be Shari'ah-
compliant
Fundamental
regulatory
problem
Which segregation of the conventional and
Islamic business can be achieved to ensure that
the Islamic window is not operating in a manner
that would violate Shari'ah
Is Integration of Regulatory Requirements for
Islamic Finance and Conventional Finance
possible??
No. Why?? Yes. Why??
Regulatory which imposes the same
systems -may be seen as imposing
conventional standards without due
consideration for Islamic finance.

Modification is required in order to
reflect the specificities of Islamic
finance
It is possible to integrate both industries as long as a MODIFICATION is made
to suit both financial sectors.
Conventional regulator equipped with adequate regulatory tools
To provide an integrated regulatory structure.
To apply across the industry and create a level regulatory
platform.
The mission of the IFSB
To provide standards and guidelines.
Is not only encouraged at the international area but is desirable
in the interest of fairness and competitiveness.
Working with IFSB & other agencies
To make the necessary adjustments to international
standards in order to reflect the needs & risks of the Islamic
financial service industry.
THANK YOU.