Islamic Banking and Finance Infrastructure Institutions - Case Study Example

ISLAMIC BANKING AND FINANCE INFRASTRUCTURE TABLE OF CONTENTS Introduction: Islamic banking infrastructure------------------------------------3 2. The role of administrative bodies-------------------------------------------------4 2.1. AAOIFI----------------------------------------------------4 2.2. IIRA--------------------------------------------------------6 2.3. IIFM---------------------------------------------------------8 2.4. IBA----------------------------------------------------------9 2.5. IFSB---------------------------------------------------------10 3. Have the Islamic standard Regulatory bodies contributed to the growth and evolution of Islamic banking?-------------------------------------------------------------------------------10 4. Are these institutions all efficiently utilized by the Islamic banks?----------11 5. What are the prospects of their growth?------------------------------------------11 6. Is there anything else needed?-----------------------------------------------------11 7. Conclusion and recommendations-------------------------------------------------12 1. Introduction: Islamic banking infrastructure Infrastructure encompasses road, bridge, railway, water-way, airway, as well as other kinds of shipping and communications along with water supply, electricity in addition to telephone. It also comprises banking institutions and such civic services as medical and learning. More universally it entails all organizational prerequisites of proficient operation of competitive marketplaces and growth in production (Rahman & Zaharuddin 2006, p.44-56). The construction of infrastructure needs massive amounts of funds. The advantages of these giant ventures are great however several of them are not direct and all of them accrue slowly towards a lengthy period of time. In the emergent nations, particularly, the private industry either lacks the way to carry out these ventures or it is not capable to discover the (low) benefits and (extended) time period concerned suitable. As a result the government is called upon to take on these investments so as to make an environment fit for enlargement as well as development. It is alleged that state revenue from all sources comprising politically appropriate amounts of levy falls short of the levels required for funding infrastructure. Therefore, the problem on hand is how to activate societys savings for this rationale. In non- interest Islamic financial structure the question is: how might the Islamic banking institutions assist in this respect. The foundation of Islamic banking structure may be traced back to the introduction of Islam when the Seer himself performed business activities for his spouse. The “Mudarba” or Islamic collaborations has been extensively acceptable by the Muslim trading society for centuries but the idea of interest has received extremely little attentiveness in usual or everyday transactions. The earliest model of Islamic financial structure came into existence in 1964 in Egypt. Ahmad Al Ajar was the core originator of this institution and the major characteristics are profit allocation on the interest-free oriented values of the Islamic Sharia. These institutions were essentially more than banking companies rather than business institutions as they give or take interest on banking transactions. In 1975, the association of Islamic States had introduced the earliest Islamic bank known as the IDB. The essential trade model of this institution was to give financial support and assistance on profit allocation (AAOIFI 2003, 21-66). 2. The Role of the Administrative Bodies 2.1. AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) It was initially called Financial Accounting Institution for Islamic banking as well IFIs. Introduced in, 1991 in conformity with the accord of IFIs and certified in 1992 at Bahrain as a company non-profit society. A very excellent number of organizational partners as well as providers concur with AAOIFI, that is, approximately 300 partners from 40 states across the world. It consists of a General Congress, a Committee of Experts, an Accounting as well as Auditing Principles Board, A Sharia Board, and Administrative board along with a Secretary General. It consists of 22 partners as well the supervisory board includes 5 members amongst the FASB (AAOIFI 2003, p.21-66). Aims of AAOIFI The central functions and aims for the creation of this executive body were; To devise auditing and bookkeeping decisions for Islamic Banking Institutions To transmit these advances and rules to all IFIs and to use them in these organizations by a range of techniques such as education, magazines, seminars as well as various other appropriate channels. To formulate and interpret auditing and bookkeeping rules and To appraise and implement transformations in the bookkeeping and auditing principles if and when required for IFIs (AAOIFI 2003, p.21-66). The goals of the AAOIFI are performed in accordance with the Sharia laws and the key function of these goals is to improve the reliance of the users of the financial statements of the IFIs, that is, the Stakeholders along with motivating them to venture in IFIs along with getting assisted with their services. Number of principles provided by AAOIFI is 87 and out of which 47 are based on Sharia, bookkeeping values are 25, auditing values are 6, on control 7 and 2 principles on law of ethics Holistically the plan of establishing AAOIFI is not constrained to the data aforementioned but it is merely to establish the readers by bringing into the light them the AAOIFI and its fundamental goals and objectives (ElHawary, Wafik & Zamir 2004, p.105-200). Function of AAOIFI The role of AAOIFFI involves providing the principles pertaining to moral code, bookkeeping as well as auditing to every Islamic banking sector whereas the IFSB is more linked with capital sufficiency, risk administration, management review procedure, company governance, clearness as well as marketplace discipline and the growth of Islamic Money Marketplace. The dealings linked to Sharia fulfillment might not be realized with the parallel technique of interest pricing thus there should be a condition of considerable bookkeeping insinuations (ElHawary, Wafik & Zamir 2004, p.105-200). The importance of Sharia principle setting authorities were recognized when Islamic banking sector was forced to safeguard their stakeholders and advance the method of risk prevention and bring up to date their technique of reporting transactions. These authorities confirmed their function and established specific Sharia principles in relation to Basel one and two. Even though AAOIFI was challenged hugely that the rules are no more than an exploitation of traditional principles but the reality is that the rules were made in accordance with the Sharia regulations to circumvent interest rooted reporting (AAOIFI 2003, p.21-66). These authorities notably increased value to the money marketplace of Islam, capital marketplaces as well as other pertinent filed of Islamic banking such as company governance, capital sufficiency and administrative review procedure The notion of Sharia rule, behaviors in business as well as ethics were paid attention to in these principles to guarantee the stakeholders and other bodies that the Islamic banking is definitely differently exercised and is really a better resolution than traditional banking (Obiyathullah 2006, p.23-87). 2.2. The role of IIRA(Islamic International Rating Agency) The Islamic International Rating Agency provides ratings of all kinds for autonomous borrowers and associated organizations. Furthermore, prior to giving a credit rating to a concern or issuer in a nation, IIRA has to initially allocate an autonomous rating to the state to set up a credit standard and autonomous upper limit for overseas currency exchanges. Also, IIRA assesses the creditworthiness of the regime of that nation, establishing its capability and readiness to totally service its banking debts on time (Obiyathullah 2006, p.23-87). A regime is almost constantly the generally creditworthy body in a nation due to its supremacies to tariff, print currency, and manage the allotment of foreign currency. No banking organization or corporation in a state may match these authorities; as a result, they are by description less capable to satisfy their monetary obligations than the federal state. Therefore, the ratings of private organizations will have a score less than that of the supreme or at best equivalent to it in a number of instances. Diverse categories of obligations and ranking scales The obligations rated by IIRA may be in form of either overseas currency or the nation’s home currency. They may be of a temporary character (maturity due within one decade) or of a long-standing character (maturity due more than one decade into the potential). They may be cross-border liability or home liability. Local exchange loans are typically ranked higher than overseas exchange liabilities because there is no exchange transfer risk included in reimbursement. Depending on the requirements of stakeholders as well as issuers in IIRA’s marketplaces, the rankings may be reliant on a global scale or on a nationwide measure, with no reference to rankings of other states as issuers (Eberhard & Rodney 2001 p. 56-90). IIRA’s global scale method for ranking sovereigns is line with most excellent practice internationally in form of data content, information under-pinning as well as its wide-ranging investigative approach. That investigative procedure has been tried for a long time and is extensively acknowledged by the obligation marketplaces as trustworthy and handy. There is no requirement for IIRA to “re-innovate the wheel.” Concurrently, IIRA contributes its exceptional stamp to the development by comprising the independence and uniqueness coupled with the Islamic marketplace (Eberhard & Rodney 2001 p. 56-90). IIRA’s forecasters are specialists in comprehending the political as well as shared traits of the marketplace and amend their evaluations to take into account those sovereigns with unique financial dependencies (for example, oil) or exceptional banking systems 2.3. IIFM a. Prudential Supervision As is the situation in traditional systems, the IIFM body ensures the firmness of the banking structure as a whole, and the appropriate conduct of entity organization. As a result, the watchdog will have to take on related decision-making and regulatory roles concerning Islamic organizations as the one previously done in relation to conformist institutions (ElHawary, Wafik & Zamir 2004, p.105-200). Concerning the execution of prudential control by itself, it is a to some extent common misinterpretation that, because Islamic finance is largely founded on profit-and-loss allocation contracts, Islamic organizations do not require to be controlled at the same degree as traditional institutions. In fact, as previously mentioned by Malik (2006, p.14-15), there are specific aspects of Islamic financial institutions that permit prudential ruling to a related degree as conventional banks. b. Industry Development The IIFM are as well mandated to serve a significant developmental function, as they may influence the level of achievement with which Islamic finance is initiated into a traditional system. In this logic, the function of the IIFM is not only to assure economic stability, but as well to promote an setting where Islamic finance may provide an appropriate reaction to clients’ desires for Islamic goods (ElHawary, Wafik & Zamir 2004, p.105-200). This is not to mean that supervisory benefits must be provided to Islamic organizations, except rather that a degree playing arena must be offered. In reality, it is probable that in the first stages of the course, a number of Islamic activities will fall into lawful emptiness and therefore might not be allowed by the present legitimate framework, or might be seen with discretion by the broad-spectrum public. 2.4. IBA (Islamic Banking Act) Roles Operation of Islamic finance implement law: IBA have to make sure that the activities of the Islamic finance system had force of decree. This is since Islamic banking was taken as an exceptional case under the traditional banking ruling. The Islamic Banking institutions require to work in line with Shariah code and are considerable variations with the traditional banking structure. As a result, IBA may guarantee that Islamic Banking Institution stick to the regulation (Alhun 2002, p.27). Exemptions from the traditional banking rules: When the Islamic banking system was launched, we require providing them specific exemptions from the traditional banking regulations. This is since the traditional finance laws do not base on the Islamic values like Shariah code. Thus, Islamic banking institution must get the exact exemptions from the traditional banking laws. Islamic banking organizations going to be improved as a completely fledged structure in Malaysia, thus, it has to be based on full set of Islamic finance legislation. Formation of Shariah Administrative Board: IBA had formed the Shariah Administrative Board at Islam Bank in Malaysia (Birhad). In 1994, Shariah Administrative Board move to Central Bank and become an only source of understanding for every Islamic banking institutions in the nation. This might guarantee consistency in understanding of the Shariah rule (Alhun 2002, p.27). 2.5. IFSB Located in Malaysia, the Islamic Financial Services Board was formally launched in 2002, and begun working 2003 Functions Formulate rules and propose implementation Give direction concerning effectual supervision and management and create risk administration and disclosure process Develop cooperation with global standard-setting authorities and member states Improve and coordinate programs to create instruments and processes for competent working and threat management 3. Have the Islamic standard Regulatory bodies contributed to the growth and evolution of Islamic banking? The requirement for an entity of accounting principles intentionally developed to mirror the specificities of Islamic goods became more moving as novel and more multifaceted tools were being sold. To seal this expanding gap, the Islamic standard Regulatory bodies (AAOIFI IIRA, IBA, and IFSB) were formed. One of the main achievements of these organizations is that they have designed and disseminated accounting as well as auditing rules that have been applied globally by all Islamic banking. This has enabled transparency and growth in the Islamic banking system. The regulatory bodies have as well played a central role in pursuit of Shariah-oriented rule harmonization over jurisdictions (Nathif 2005, p.67-90). 4. Are these institutions all efficiently utilized by the Islamic banks? Even though Islamic financial institutions have usually outperformed traditional banks in form of expansion over the previous years, they have not constantly outperformed them in form of efficiency and profitability. For instance, numerous undersized Islamic institutions in the GCC have been striving for decades to become profitable; others have been negatively impacted by the regional financial calamities (Nathif 2005, p.67-90). 5. What are the prospects of their growth? Exploiting the niche Completely exploiting the Islamic finance niche implies targeting client segments that care mainly profoundly regarding Sharia conformity in their banking transactions and offering goods and services that satisfy not only universal banking but also Muslim-exact client preferences. While Islamic finance goods for fundamental banking flourish (for instance, car finance with credit cards), and whereas there is yet "white gap" in a number of more complicated sections (for instance, property management and capital management), such goods personalized to Muslim-exact needs offer a platform for exact differentiation (Nathif 2005, p.67-90). 6. Is there anything else needed? To maintain profitable development a more stylish leveraging of the Islamic financing prospective-much of whose potential has not yet been utilized—is needed (Nathif 2005, p.67-90). Tactically, this implies that Islamic financial institutions, which so far frequently entirely imitate a traditional banks provision, require revisiting their positioning. Functionally, they require seeking bigger efficiency all over the value chain (Eberhard & Rodney 2001 p. 56-90). 7. Conclusion and recommendations Islamic finance has been creating headway into a growing number of Western states. This is certainly a drift that is expected to persist, as petroleum-exporting countries prolong to mount up riches, GCC along with South Eastern Asian Islamic banking marketplaces increase more, and corporations in Western countries persist contending to draw global investors. Nevertheless, regardless of the quick expansion of Islamic banking in the previous few decades, numerous management bodies and providers are unknown with the course by which Islamic banking institutions are initiated into a traditional system. This thesis has tries to provide some light in this field. As Islamic banking prolongs expanding, the administrative bodies will have to guarantee that these new organizations become completely incorporated with the rest of the banking system. The incorporation course will not only involve letting Islamic companies to work, but as well offering a wide-ranging regulatory structure along with creating an accommodating financial infrastructure (Malik 2006, p.14-15). Comprehending Islamic finance is also important from an economic stability viewpoint, at least on two reasons. Foremost, Islamic banks can become logically significant as they develop and progressively more cooperate with systemically significant traditional banks. Second, the existing shortage of Islamic hedging tools leads to the increase of risks in few organizations. Managing the accumulation of risks and its prospective effect on Islamic banking organizations must become a routine duty for the authoritarian authorities. Bibliography AAOIFI, 2003, Conversion of a Conventional Bank to an Islamic Bank: Sharia Standard; AAOIFI, Kingdom of Bahrain. Alhun, Muhammad, 2002, Islamic Banking and Finance: Theory and Practice, State Bank of Pakistan Press, Karachi, Pakistan. Eberhard B & Rodney Wilson, 2001, “Financial Markets in the GCC: Prospects for European Co-operation,” European University Institute Policy Paper 01/2, USA El-Hawary, Dahlia, Wafik Grais, and Zamir Iqbal, 2004, “Regulating Islamic Financial Institutions: The Nature of the Regulated,” World Bank Working Paper 3227, Washington Nathif, Adam, 2005, “Converting a conventional retail bank to Islamic banking” in Islamic Retail Banking and Finance, Sohai l& Jaffer, England. Obiyathullah, Bacha, 2006, “Derivative Instruments and Islamic Finance: Some Thoughts for a Reconsideration,” International Journal of Islamic Services, Vol. 1, no.1 pp. 23-87. Rahman, A & Zaharuddin, U. 2006, “Sharia-compliant paid-up capital,” Business Times RHB. Malik, Al-Awan, 2006, “Globalization of Islamic funds,” Islamic Banking and Finance, issue 11, pp. 14-15. Read More