Chartered Institute of Arbitration (CIArb)

Islamic Finance and Banking Practices

Reconciling Tradition and Modernity
Kingdom of Bahrain, 31 October 2016

Compatibility Issues and

Discrepancies between Islamic
finance modern banking practices
Mohammad Majd Bakir
Senior Manager
and the law: Is the future bright?
Accounting and Governance Standards Development
AAOIFI 31 October 2016
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

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

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

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

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

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

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 [‫] األصل في المعامالت األباحة‬.
• 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

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

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

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

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

 Thank You

Accounting and Auditing Organization for Islamic Financial Institutions

(AAOIFI)
+973 1737 5418
Kingdom of Bahrain
mbakir@aaoifi.com
www.aaoifi.com
‫محمد مجد الدين‬
‫باكير‬

MMB, AAOIFI, 31 October 2016