The presence of an appropriate regulatory framework supported by the financial policy is vital for an “enabling environment” that provides healthy development and growth of financial markets. It is more relevant to the Islamic financial services industry, where various types and degrees of risk arise from the complex nature of Shari’a-compliant investments and continual innovation. In light of this, Edbiz Consulting and Cambridge IF Analytical conducted a global survey to capture a snapshot of perceptions of various stakeholders in the global Islamic financial services industry on the need of an Islamic financial policy in different countries of the world.
The global survey takes an in-depth look at the existing levels of perception, knowledge, and awareness of Islamic financial policy. It also provides insights into the perceived importance of having formal laws and legislations governing Islamic banking and finance (IBF), either at the national and international level. The survey polled some 2,170 online respondents in 43 countries from Australia and New Zealand (2%), Asia (73%), Africa (7%), Europe (15%) and Americas (3%). Clearly, the sample was highly biased in favor of Asia but there was also sufficient representation of other regions (see Figure 1).
The respondents came from 165 institutions (banks, fund management companies, central banks, consultancy firms, universities and other organisations). Most of them were professionals working in the financial services industry (51%) and a significant proportion came from academia (23%). Although no direct questions were asked about educational backgrounds of the respondents, it is evident from the composition of the survey that they were educated and reasonably informed about financial services, in general, and Islamic banking and finance, in particular. This statistical bias must be kept in mind while reading the rest of this chapter.
Q1: In your country of residence, is there any law on Islamic banking and finance (e.g., Islamic Banking Act or any other legislation passed through a representative body like Parliament)? [Please note that the law in this context does not include rules and regulations introduced by a financial regulator or a central bank.]
Most of the respondents answered affirmatively “Yes” (52%), while others either answered “No” or they were “Not aware of any such legislation”. Those who responded positively were predominantly from the countries where IBF is significant and visible. Interestingly, all the 330 respondents from Malaysia answered “Yes”. In case of Pakistan, however, only 63% of the respondents said “Yes”, although there is no specific Islamic Banking Act in the country. It implies that many of the respondents may have not understood the question correctly.
Q2: Do you think such law is sufficient and effective for the promotion of Islamic banking and finance in your country of residence?
Although 52% of the respondents believed that the prevailing legislation in their countries of residence were sufficient and effective for the promotion of IBF, further scrutiny of the data revealed that only half of those who said “Yes” to Q1 agreed to this statement. Nearly half of the respondents (45%) felt that the current law on IBF in their countries were either not sufficient or effective in promoting IBF to its fullest potential. This means that while there is widespread awareness about legislation governing IBF, a significant proportion of the respondents thought that the prevailing laws and legislation did not sufficiently promote IBF in their countries. From this finding, one may imply that majority of the respondents opined the importance of having or introducing a legal framework for Islamic finance.
Q3: Does the central bank (or any other financial regulator) in the country of your residence have specific rules and regulations relating to Islamic banking and finance?
The awareness of the role of financial regulators in IBF is more widespread than that of other government bodies or agencies. Majority (88%) of respondents reported to being aware of the rules and regulations pertaining to IBF, as issued by the central bank. Consistent with the responses in Q2, however, almost half of them doubted that these rules and regulations were sufficiently helpful for IBF.
Q4: In your country of residence, is there a separate department/division at the Central Bank or at other regulatory body that oversees Islamic finance activities?
As the above graph suggests, only half of the respondents were aware of a specific department set up for dealing in matters related with IBF, either at the central bank level or within any other government body such as ministries of finance or religious affairs and awqaf. The non-existence of a separate Islamic banking department is understandable in non-Muslim countries where IBF is a fringe activity and has yet to receive any significance or mainstream relevance. In Muslim countries where IBF exists, such a vacuum may exist because of small share of IBF nationally or because government authorities do not take sufficient interest in IBF. Our sample includes countries like India where Muslims have for long been trying to convince the central bank and other government bodies to allow the setting up of Islamic banks, but the response from successive governments has not favoured such requests.
Q5: Name any FIVE countries where legislations specific to Islamic banking and finance exist?
The following countries were named, with significant responsibility, in this respect. It is not surprising that Malaysia tops the list, as it is the most active player in the global Islamic financial services industry. However, Saudi Arabia is a curious case, as there is no specific legislation, like an Islamic Banking Act, therein, although IBF has prospered in the country. Iran, Sudan and Indonesia are the other countries where there are specific Islamic Banking Acts but the respondents were by and large unaware of such legislations.
Q6: Do you think the absence of proper legislation by parliaments and other legislative bodies in individual countries is a hindrance to the growth of Islamic banking and finance?
There is widespread realization amongst the respondents that the absence of proper legislation by parliaments and other legislative bodies is a major hindrance to the development of IBF, as agreed by 88% of the respondents. Although IBF is primarily a business phenomenon, government support is absolutely important for its growth and further development. Malaysia provides the best example in this respect, and other governments, especially in the OIC block, must learn lessons from the Malaysian model for the development of IBF. Interestingly, about 9% are of the view that there was no need for such legislation. It seems like not a completely irrational view, especially in the context of countries such as Saudi Arabia where IBF has prospered without any specific legislation in this regard.
Q7: What factors have hindered legislation of Islamic banking and finance in different countries of the world?
It seems as if the lack of legislation in favour of IBF in most of the Muslim countries is not due to the opposition by political parties. Rather it is due to the sheer lack of political will. Furthermore, the masses have not felt the need for such legislative changes, and hence political parties have not placed IBF high on their political agenda or elections manifestos. Resistance from bureaucracy is viewed by respondents as more important in this respect than the lack of interest from politicians.
Q8: In your views, which government department or ministry should be responsible for formulating Islamic financial policy in a country?
The loud and clear message from the survey is that the central bank and ministry of finance are the two government bodies that must be made responsible for formulating Islamic financial policy in the country. In many countries, these two bodies work together and there is a need to create a liaison function specific to IBF between these two organs of the government. The respondents seem to play down the importance of any direct involvement of the office of the prime minister or president and are not fully convinced of the role of an independent think-tank in the formulation of Islamic financial policy. The results may be based on the success of Malaysia in developing its IBF with Bank Negara Malaysia (as the central bank) and the Ministry of Finance spearheading and charting the development of Islamic finance in the country.
Q9: In your views, which countries have received the strongest political and/or government support for the development of Islamic banking and finance in their respective jurisdictions?
The maximum number of the respondents who answered this question favoured Malaysia. The numbers given in the chart below are the number of votes received by each country. Not surprisingly, Malaysia’s success story is well known and received by the respondents.
Q10: Do you think that governments in countries where Islamic banking and finance exists should set up Centralized Shari’a Advisory Boards completely independent of: a. Central bank, b. Other financial regulators, c. Islamic banks and financial institutions
There is an overwhelming response in favour of the complete independence of Shari’a Advisory Boards. In particular, the respondents favoured the idea of setting up Shari’a Advisory Boards independent of the Islamic banks and financial institutions (77%). This implies that a Shari’a Advisory Board completely independent of regulators and industry players should be complemented by monitoring and supervisory functions at the regulators’ and institutions’ levels.
Q11: Which institution should be responsible for setting up the Centralised Shari’a Advisory Board?
While the respondents favoured the independence of the Centralized Shari’a Advisory Board, they nevertheless saw a role for the Central Bank in setting it up and perhaps maintaining it. Given the overwhelming votes for all the five options presented to the respondents (see chart below), the feasibility of setting up a committee comprising members for all the bodies should oversee the functioning of the Centralized Shari’a Advisory Board, while the main responsible for setting it up may in fact be the Central Bank.
Q12: Which multilateral institution has helped in formulating Islamic financial policies in different countries of the world?
There is ample evidence of recognition of IDB, IFSB and AAOIFI in helping to formulate Islamic financial policies in different countries of the world. The role of IIFM has also gained recognition whereby 65% of respondents acknowledged the role of IIFM. Only 18% and 17% of respondents recognized the roles of World Bank and IMF respectively. Hence, there is a need for greater engagement with these international multilateral institutions, especially in the development and promotion of Islamic finance as a viable and stable financial systems at the global level.
Q13: Respondents were also asked to state their level of agreement or disagreement with statements related to the development of a sound and robust Islamic banking and finance.
About 76% of respondents favoured the idea that the use of interest should be banned altogether in the Muslim-majority countries comprising the Organization of Islamic Cooperation (OIC). Only 27% of the respondents viewed that Islamic banks and financial institutions should follow the same rules and regulations as other interest-bearing banks and financial institutions, with 64% opined that separate rules and regulations should govern Islamic financial institutions. Over 90% deemed specific legal and regulatory frameworks for Islamic banking and finance as important to the development of a resilient and stable Islamic financial services industry. They also favoured a well-established Shari’a governance framework for a comprehensive regulatory and supervisory infrastructure with 93% agreeing to this statement. Meanwhile 86% of the respondents agreed that a robust legal framework in Islamic finance provides an enabling platform for practitioners to develop more innovative and complex financial products.
Q14: In your opinion, what is the best model for implementing Islamic banking and
finance?
Although there are only two countries (Iran and Sudan) with full-fledged Islamic financial systems, the proposition of a complete transformation of the system into an Islamic economic system was the most favourable system as chosen by 72% of respondents. It is interesting to note that although the majority of respondents reside in countries where a dual banking system is being practiced, only 49% of respondents viewed this system as the best model for implementing IBF. Only 30% of respondents opined that the best model for implementing IBF is the single regulatory framework for all banks and financial institutions, both conventional and Islamic.
This report recommends that the chapters on Islamic financial policies in different countries of the world should be read in light of the above observations when developing and implementing a legal and regulative framework for IBF including the formulation of an Islamic financial policy. Overall, majority of respondents who take part in this survey are of the view that it is imperative for IBF to have a specific legal, regulative and governance framework given the distinctive and unique characteristics of Islamic finance.
