Compatibility Issues and Discrepancies between Islamic finance modern banking practices and the law: Is the future bright?

1. Mohammad Majd Bakir
Senior Manager
Accounting and Governance Standards Development
AAOIFI 31 October 2016
Compatibility Issues and
Discrepancies between Islamic
finance modern banking practices
and the law: Is the future bright?
Islamic Finance and Banking Practices
Reconciling Tradition and Modernity
Kingdom of Bahrain, 31 October 2016
Chartered Institute of Arbitration (CIArb)

2. 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

3. 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).
MMB, AAOIFI, 31 October 2016

4. 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.
MMB, AAOIFI, 31 October 2016

5. 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.
MMB, AAOIFI, 31 October 2016

6. 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 October 2016

7. 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 October 2016

8. 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]
MMB, AAOIFI, 31 October 2016

9. 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.)
MMB, AAOIFI, 31 October 2016

10. 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.
MMB, AAOIFI, 31 October 2016

11. 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.
MMB, AAOIFI, 31 October 2016

12. 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)
MMB, AAOIFI, 31 October 2016

13. 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 October 2016
‫الدين‬ ‫مجد‬ ‫محمد‬
‫باكير‬