Islamic Finance

INTERVIEW-Challenges, policies and frameworks in the Islamic finance ecosystem: IFAAS

| 03 January, 2018 | Interview
INTERVIEW-Challenges, policies and frameworks in the Islamic finance ecosystem: IFAAS
Photo: A screen displays stock market movements at a window of the London Stock Exchange in the City of London at lunchtime October 1, 2008. REUTERS/Toby Melville 

This article is sponsored and produced by Islamic Finance Advisory & Assurance Services (IFAAS) as part of the ICD-Thomson Reuters Islamic Finance Development Report 2017. In this interview, Mohammad Farrukh Raza, Managing Director of IFAAS and Member of AAOIFI’s Governance & Ethics Board, answers questions about challenges, critical factors for success, policies and frameworks in the current Islamic finance ecosystem.

The report can be downloaded from HERE.

In your view, what are the biggest challenges in the development of Islamic finance?

The Islamic finance industry has developed significantly over the last couple of decades. However, certain challenges remain to be addressed. The biggest of these is awareness, as most people – whether consumers or business managers and owners, practitioners or regulators – do not fully understand the underlying principles of Islamic finance and how Shariah-compliant products work. I see awareness as the Achilles heel of Islamic finance, and this area needs more attention than any other.

Human capital is another major challenge. Developing a new breed of practitioner who believes in Islamic finance and can convey its spirit to others, while reflecting its spirit operationally, is a major need of the industry.

If these two key challenges are met, many other issues – such as product innovation and differentiation, Shariah governance, consumer confidence, and standardisation – will become much easier to solve.

Finally, the industry has now reached the stage where a fully developed ecosystem will be required to support and sustain its future growth.   

What is meant by the Islamic finance ecosystem and why do you think it is important for the industry’s growth?

The success and continuous growth of any industry depends upon how fast it can develop the infrastructure required to make it more inclusive and accessible for the masses.

The Islamic finance ecosystem includes the appropriate legislative, legal and regulatory frameworks that recognise the intrinsic approach of Islamic finance and allow it to operate efficiently within a diverse financial system. It also includes supervisory, accounting and taxation frameworks that provide a level playing field with conventional finance and promote healthy competition between this and Islamic finance.

Also required are functional and dynamic Islamic money and capital markets with enough supply and trading of instruments to meet growing industry demand, along with bespoke liquidity management solutions and financial safety nets.

Corporate and Shariah governance structures that are fit for purpose, in addition to strategies for developing sustainable human capital and awareness are also part of this ecosystem, which now includes technology as a critical component of the modern world.

Some countries are applying an integrated approach towards developing this ecosystem. However, a wider effort at industry level is also required from active players and new entrants in Islamic finance.   

Islamic finance is flourishing, so why would we need bespoke policies and frameworks?

Indeed, the industry has grown remarkably, but it remains short of reaching its full potential in the absence of an enabling environment. It’s like the difference in performance between driving a Formula 1 car on a bumpy dirt road and driving it on a race track. Hence having bespoke policies and frameworks gives Islamic finance the opportunity to operate in harmony within the wider financial system and enables it to demonstrate its true spirit and tangible benefits for governments, businesses, and people of all backgrounds.

Such an approach requires a unified vision of Islamic finance, underpinned by concerted efforts by all stakeholders within the market. The countries that are enjoying the market’s leadership positions are reaping the rewards of such visions. 

Given your vast experience in policy-level advisory, could you list the five critical factors for success in Islamic finance?

We have worked with over 20 governments and regulators on different types of issues related to the development of Islamic finance. From experience, we know that having a common vision about Islamic finance shared by all stakeholders usually comes at the top of the success pyramid. Coordinating and channelling all efforts towards achieving that vision and the agreed objectives comes second. Then you need to make sure that you have adequate and supportive frameworks and policies, well-designed strategies for human capital development, and, of course, as we said earlier, the means to deal with awareness challenges. These are the critical factors that lead to the success or failure of Islamic finance within any market.

Tell us about IFAAS and which of your projects make you most proud?

IFAAS (Islamic Finance Advisory & Assurance Services) is a professional advisory firm, fully dedicated to Islamic finance. Over the decade of our existence, we have been blessed to undertake projects in over 40 countries spread across five continents.

We take pride in our team and all the projects it has completed. Our flagship projects to date include developing a national masterplan for the government of Indonesia to grow the Islamic finance industry in the world’s largest Muslim population and a G20 economy; making legislative and regulatory reforms in Kenya by way of leading the government’s Islamic Finance Project Management Office; preparing the regulatory, governance, taxation and accounting frameworks serving the Islamic banking, capital markets and microfinance sectors for the Central Bank of West African States; and winning the first Ethical Finance Innovation Challenge Award for our mudaraba-based working capital financing product for corporates and SMEs.

The journey continues as we expand our wings further and look forward to continue playing a leading role in developing an inclusive Islamic financial industry in line with its true spirit.

DOWNLOAD THE REPORT

Report: ICD-Thomson Reuters Islamic Finance Development Report 2017

© Thomson Reuters 2017 All rights reserved

Mohammad Farrukh Raza has many years of extensive and diverse experience within the Islamic finance industry. His contribution involves policy-level advisory to the governments of more than 20 countries, building the infrastructure for Islamic finance, and playing key roles in launching ground-breaking Islamic finance operations across several jurisdictions. He led IFAAS team in various high-profile projects, from the development of national Islamic finance masterplans, strategic blueprints and regulatory frameworks to launching over 150 products for institutional clients. He is actively contributing towards the industry’s thought-leadership and standard-setting, pushing Islamic finance to a higher degree of Shariah compliance, professionalism and inclusiveness.

© Thomson Reuters 2018 All rights reserved