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IFSB issues new governance and capital adequacy guidelines April 16, 2009

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The International Financial Services Board (IFSB), the standard-setting body based in Malaysia, has recently adopted two new standards for Shari’ah-compliant finance. The two standards are, Guiding Principles on Governance for Islamic Collective Investment Schemes (IFSB-6), and Capital Adequacy Requirements for Sukuk Securitisations and Real Estate Investment (IFSB-7). They update and complement existing recommendations issued by IFSB in the past in their own particular areas. Specifically, they build on the standards of Guiding Principles on Corporate Governance for Institutions offering only Islamic Financial Services (IFSB-3), and Capital Adequacy Standard for Institutions offering only Islamic Financial Services (IFSB-2). These standards were formulated in 2006 and 2005 respectively.

IFSB-6 is designed to reinforce existing international best practices in the area of collective investment schemes, but also to address the specifics of the Islamic variants of this model of finance. It is split into four parts, which relate to general governance and the incorporation of best practices, transparency and disclosure issues, Shari’ah compliance, and the additional protection required by investors in Islamic collective investment schemes. IFSB-7 looks to cover those areas of capital adequacy which are not already covered by IFSB-2. This Standard applies to both issuing and originating Islamic financial institutions (including originating institutions that invest in Sukuk which they themselves originate). For real estate finance, IFSB-7 focuses principally on the capital requirements for a Shari’ah-compliant institution which invests its own funds in real estate investment activities. IFSB-7 also places importance on the necessity for those authorities which supervise Islamic banks to set appropriate threshold limits.

IFSB, which is a global organisation, is comprised of regulatory and supervisory agencies, which all have a vested interest in ensuring the soundness and stability of the Islamic financial services industry. It covers a wide range of sectors, from banking and insurance to capital markets. Its membership has now reached the total of 178, including the International Monetary Fund (IMF), the World Bank, the Bank for International Settlements (BIS), Islamic Development Bank and Asian Development Bank.

Source: New Horizon (Global Perspective on Islamic Banking and Insurance) 01 April, 2009

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