It gives me great pleasure to welcome this gathering of senior officials of regulatory and supervisory bodies, ministries, national statistical offices, international and multilateral institutions at this ‘Conference on Soundness Indicators for Conventional and Islamic Finance'.
On behalf of the IFSB, I wish to thank the Arab Monetary Fund (AMF) and International Monetary Fund (IMF) for partnering with us in holding this timely and important event with its focus on the Arab World.
I would like to extend my special thanks to the AMF, and to its Chairman, HE Dr. Abdulrahman for hosting this event. The IFSB has a special regard for HE who is a key figure in the establishment of the IFSB and who has been instrumental in some of the most important aspects of the IFSB’s work programme as it has evolved over time.
It is a real pleasure to collaborate again with Dr. Abdulrahman and the institution he heads, the AMF.
The AMF is the premier platform for monetary and financial cooperation in Arab-speaking countries, and a highly valued MOU partner of the IFSB.
We look forward to many years of fruitful collaboration with the AMF and with HE Dr. Abdulrahman Al Hamidy.
Excellencies, Ladies, and Gentlemen
The focus of this Conference is the Arab-speaking jurisdictions, a key group of stakeholders within the IFSB and IMF, and of course central to the AMF.
However, the stability and soundness issues that will be addressed here over the next two days have a broader dimension that will interest a wider set of stakeholders.
This includes all the major Arab central banks, which are members of the IFSB PSIFI’s project. It also includes the Asian and African central banks that were the pioneering members of the original IFSB Pilot Project and Task Force, and others who have joined more recently, who are now regularly providing PSIFI data, and who are participating with us here in Abu Dhabi.
Finally, in addition, there are the international institutions such as the IMF, which are responsible for the global financial sector surveillance function. I am also delighted to see the presence of the European Central Bank (ECB), an institution with which the IFSB has collaborated in the past.
The IMF’s presence here with us reflects long years of collaboration between the IFSB and the Statistics Department of the IMF on the development of soundness indicators, reflecting an early recognition by the IMF of the wider significance of Islamic financial systems.
Since then, the growth and geographical spread of Islamic finance in the post-crisis period has led to its emergence as a systemically important sector in an increasing number of economies in the Arab speaking countries, as well as in Asia.
These developments – which are helping to transform the global financial system – have had their most recent recognition in the Press Release of 21 February 2017 on Islamic finance, in which the IMF’s Board of Directors gave its approval to staff to prepare proposals for operationalising the IMF’s policy support to Islamic finance jurisdictions.
A key aspect of the proposals is that they will recommend the recognition of the IFSB’s Core Principles for Islamic Finance Regulation of the Banking Sector (IFSB-17), under the IMF/WB Standards and Codes Review.
The IFSB welcomes these developments, which point towards an international recognition of Islamic finance that is commensurate with its importance and significance to large communities of human beings in the world today, and to financial and economic stability internationally.
Ladies and Gentlemen,
Against the backdrop of the global financial crisis, there is today an enhanced understanding of the intrinsic strengths of Islamic finance. These strengths draw on its system of ethics, its grounding on the real economy and on risk sharing, its avoidance of harmful activities, and other aspects including for shared prosperity, all of which together constitute its system of embedded governance.
At the same time, the crisis has also sharpened our understanding of the core vulnerabilities or risks to the stability and resilience of Islamic financial systems, which are both internal as well as external to Islamic finance.
The internal challenge to stability is that of underdeveloped systems and capabilities for risk management within domestic Islamic financial systems arising from relatively underdeveloped, but still developing, Islamic financial markets and financial instruments.
There are also weak information and related systems within both financial institutions and regulatory and policy making bodies for managing risk at both micro and macroprudential levels.
These issues and challenges are being addressed by policy makers and regulatory and supervisory authorities, across Islamic finance jurisdictions and institutions, although at differential speeds and with differing levels of effectiveness.
The external vulnerability is faced by us all: namely, that the performance of the Islamic financial system cannot be isolated from developments in conventional finance and in the global economy.
We are vulnerable to external economic, financial and monetary shocks and these seem to be bigger or more volatile than ever. These vulnerabilities remain with us, they are real and they bring large risks with them which must be identified, made transparent, and managed at both the micro and macro levels.
Thus a critical question relating to the stability of Islamic financial institutions and systems is how resilient the industry is in withstanding turbulence arising from both internal and external sources of risk.
To answer this question we need a well-developed global database for the purpose of macroprudential oversight. A timely and reliable time series data would help to promote effective monitoring of resilience and stability as well as to enhance comparability within and between jurisdictions.
The Financial Soundness Indicators, launched by the IMF and adapted by the IFSB, provide us with valuable tools in this risk management task. Financial Soundness Indicators (FSIs) are measures of the aggregate strength or vulnerabilities of financial systems. They are macroprudential indicators of the condition of the entire system that supplement the traditional microprudential measures used by bank supervisors.
This sets the stage for the deliberations here at our conference where we will be focusing, amongst other topics, on two central issues
- First, in developing our understanding of how soundness indicators on Islamic finance can serve both national and domestic goals for financial stability
- And second, the importance of collaboration among both international and national organisations, across both Islamic and conventional financial systems and jurisdictions
The IFSB featured these two issues in an essential way in the launching of its project in December 2004 to establish a global database of Prudential and Structural Islamic Financial Indicators (PSIFIs), which are the measures of the aggregate strength or vulnerabilities of the Islamic financial system.
This project reflected the recognition of the IFSB’s Council that it would be crucial in terms of macroprudential oversight for the industry to develop an equivalent set of FSIs for the Islamic financial services industry, comparable to those of the IMF, suitably adapted to the specific characteristics and needs of Islamic banks.
The IFSB was able to pursue this undertaking through the support received from international agencies such as the IMF, which provided technical support and knowledge at the outset, as well as the Islamic Development Bank (IDB) and the Asian Development Bank (ADB), both of which have provided long- term financial and policy support over the years for this project.
The IFSB developed its project on PSIFIs in three different phases with the aim of illuminating the structural development and soundness of Islamic finance, and thus contribute to the overall financial soundness of national financial systems.
In phase I, the IFSB Secretariat established a Task Force for the project and undertook the preparation of a Compilation Guide which was adopted by the IFSB Council in March 2007. The IMF, ADB and the IDB were and remain important members of this and subsequent Task Forces.
This was followed in Phase II by a pilot study of the compilation of data through which the IFSB developed a standardised reporting template in which four member countries – namely Indonesia, Malaysia, Pakistan and Sudan – participated.
In 2014, the IFSB launched the third phase of the PSIFIs project with the aim of achieving, by 2016, the first dissemination of data, as well as a further revision of the Compilation Guide. For the Compilation Guide, a key objective was to align it with the developments of Basel III.
This phase included capacity building, data collection and compilation activities involving regulatory and supervisory authorities from the banking sector of 17 member countries. Many of you here today will have participated in this most recent phase of the PSIFIs project.
After the successful launch of PSIFIs data on 27 April 2015, the IFSB has been regularly disseminating macro-level data collected from 17 IFSB member countries. The database is accessible to everybody where quarterly data from December 2013 is now available.
Overall, the PSIFIs member countries collectively hold more than 85% of global Islamic banking assets.
Amongst these countries are eight (8) economies which are also members of the AMF, and in which the Islamic finance sector is of systemic importance – in that it accounts for more than 15% of total banking sector assets.
Moving forward, the IFSB Council has approved a fourth Phase of the PSIFIs project intended to further extend the coverage of the database to additional countries that have a stake in the Islamic banking sector.
I am pleased to share with you that based on our latest invitation, the Bank of England has also confirmed that it will join the PSIFIs project.
Ladies and Gentlemen
Today, the PSIFIs database comprise a set of well-developed and tested Islamic finance statistics reflecting Sharī`ah-compliant accounting practices and regulatory standards that serve the purpose of better oversight by regulatory and supervisory authorities and the global surveillance community, as well as the analytical needs of the IFSB which are shared with our international stakeholders through the IFSB’s Annual Islamic Financial Services Industry Financial Stability Report.
The PSIFIs consist of 19 core and 8 additional core indicators, compared to the IMF’s FSIs 12 core and 8 additional core indicators. PSIFIs data are also, similar to the FSIs, aggregated banking sector data of an individual country.
Since almost all of the core indicators on asset quality, earnings, leverage, liquidity and sensitivity to market risks are similar to FSIs, the indicators would permit a comparison with the IMF’s FSIs for a country’s entire financial system.
These PSIFIs would also facilitate comparisons between conventional banks and institutions offering Islamic financial services as part of a peer group exercise on the effectiveness of the application of the IFSB capital adequacy formula.
Ladies and Gentlemen
Allow me to draw my remarks to a close by acknowledging the national and international collaboration that has supported the PSIFIs project.
Such collaboration is essential in a highly connected financial system in which shocks and developments are transmitted and amplified rapidly. Mutual assistance and collaboration contributes to mutual stability and resilience.
The national and international members of the IFSB PSIFIs Task Forces have contributed enormously to the development and the streamlining of the reporting formats, and to the coming on line of this project.
It will be important to continue this collaboration, and to develop both formal and informal networks of experts and knowledge centres, as we jointly attempt to better understand and control both domestic and cross-border sources of risks emanating from interconnected financial and economic systems.
Our goal should be further collaboration among international and national organisations so as to better measure these interconnected elements which can support better contingency planning and timely policy response by the authorities.
I look forward to the further strengthening and expansion of the PSIFIs project, which is in your hands, and hope that we all will benefit from the continued support of the IMF, IDB, ADB as well as the AMF.