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Islamic Finance: The New Regulatory Challenge, 2nd Edition

Book Description

From the world's foremost authorities on the subject, the number-one guide to Islamic finance revised and updated for a post-crisis world

Because it is entirely equity-based, rather than credit-based, Islamic finance is immune to the speculative bubbles and runaway volatility typical of Western finance. Especially now, in the wake of the global financial crisis, this has made them increasingly attractive to institutional investors, asset managers and hedge funds in search of more stable alternatives to conventional financial products. With interest in Islamic finance swiftly spreading beyond the Muslim world, the need among finance and investment professionals has never been greater for timely and authoritative information about the rules governing Islamic finance. This thoroughly updated and revised second edition of the premier guide to regulatory issues in Islamic finance satisfies that need.

  • Addresses the need for banks to develop common Islamic-based international accounting and auditing standards

  • Clearly explains the key differences between Shari'ah rulings, standardization of acceptable banking practices, and the development of standardized financial products

  • Explores the role of the Shari'ah Boards in establishing common rules regarding the permissibility of financial instruments and markets

  • Offers guidance for regulators seeking to adapt their regulatory frameworks to the needs of the fast-growing Islamic finance sector

  • Table of Contents

    1. Cover
    2. Contents
    3. Title
    4. Copyright
    5. Dedication
    6. About the Editors
    7. About the Contributors
    8. Foreword
    9. Preface
    10. Acknowledgments
    11. Part One: The Nature of Risks in Islamic Banking
      1. Chapter 1: Supervision of Islamic Banks: The Regulatory Challenge—Basel II and Basel III
        1. 1. Introduction
        2. 2. The Structure of Basel II and Basel III: Supervisory Implications
        3. 3. The Islamic Financial Services Board
        4. 4. Contents of This Book
        5. Notes
        6. References
      2. Chapter 2: Banking and the Risk Environment
        1. 1. The Global Risk Environment
        2. 2. The Regulatory Environment
        3. 3. The Implementation Environment (Setting Up a Risk Management Framework in a Bank)
        4. 4. The Future Risk Environment
        5. 5. Islamic Banks and the Risk and Regulation Environment
      3. Chapter 3: Risk Characteristics of Islamic Products: Implications for Risk Measurement and Supervision
        1. 1. Introduction
        2. 2. Background
        3. 3. Types of Risks in Islamic Finance and Their Measurement
        4. 4. Overall Risk of an Islamic Bank and Approaches to Risk Mitigation
        5. 5. Summary and Policy Conclusions
        6. Notes
        7. References
      4. Chapter 4: Risk in a Turbulent World: Insights from Islamic Finance
        1. 1. Introduction
        2. 2. Functions of Risk
        3. 3. Dealing with Risk
        4. 4. The Fundamental Law of Risk
        5. 5. Islamic Finance
        6. 6. Functions of Risk in Islamic Finance
        7. 7. Risk Exchange in Islamic Finance
        8. 8. Regulatory Implications
        9. 9. Conclusion
        10. Notes
        11. References
      5. Chapter 5: Capital Structure and Risk in Islamic Financial Services
        1. 1. Introduction
        2. 2. Risk and Capital Structure in Islamic Banks
        3. 3. Risk and Capital Structure in Takaful (Islamic Insurance) Undertakings
        4. 4. Concluding Remarks
        5. References
      6. Chapter 6: Inherent Risk: Credit and Market Risks
        1. 1. Introduction
        2. 2. Distinctive Risks
        3. 3. Inherent Risks in Shari’ah-Compliant Products and Services
        4. 4. Conclusion
        5. Appendix
        6. Notes
      7. Chapter 7: Operational Risk Exposures of Islamic Banks
        1. 1. Introduction
        2. 2. Basel III Requirements and Their Implications for Operational Risk Management
        3. 3. Operational Risk: The Basel Methodology
        4. 4. Operational Risk in Islamic Banks
        5. 5. Unique Operational Risks of Islamic Financing/Investment Modes
        6. 6. Qard
        7. 7. Concluding Remarks
        8. Notes
      8. Chapter 8: Information Technology Risks in Islamic Banks
        1. 1. Introduction
        2. 2. Important Understandings and Facts
        3. 3. ITS Operational Risk—Business, Documentation, and Legal Issues
        4. 4. Technical and Functional Clarification for the Imposed Risks
        5. 5. Concluding Remarks
        6. Note
      9. Chapter 9: Law and Islamic Finance: An Interactive Analysis
        1. 1. Introduction and Overview
        2. 2. Islamic Jurisprudence in Modern Times
        3. 3. Enforceability of the Shari’ah
        4. 4. Enforceability of the Shari’ah: Case Law and Transactional Practice
        5. 5. Transactional Practice: Legal Opinions
        6. 6. Sukuk: Capital Markets and Secondary Markets
        7. 7. Summary and Conclusion
        8. Appendix
        9. Notes
      10. Chapter 10: Legal Risk Exposure in Islamic Finance
        1. 1. Introduction
        2. 2. Defining Legal Risk
        3. 3. Greater Risk from Uncertain and Undeveloped Law and Regulation
        4. 4. Greater Risk from Poor Documentation
        5. 5. Greater Risk from Unpredictable Dispute Resolution Processes
        6. 6. Concluding Remarks
        7. Notes
      11. Chapter 11: Shari’ah–Non-compliance Risk
        1. 1. Introduction
        2. 2. Risk from an Islamic Perspective
        3. 3. The Concept of Shari’ah Compliance
        4. 4. Shari’ah–Non-compliance Risk and Its Impact
        5. 5. Dealing with Shari’ah–Non-compliance Risk
        6. 6. Measuring Shari’ah–Non-compliance Risk
        7. 7. Fiqh al-Muwazanah
        8. 8. Rectification of a Shari’ah–Non-compliant Contract
        9. 9. Mitigation of Shari’ah–Non-compliance Risk
        10. 10. Conclusion
        11. Notes
      12. Chapter 12: Supervisory Implications for Islamic Finance: Post-Crisis Environment
        1. 1. Regulation and Supervision
        2. 2. Supervisors and Shari’ah
        3. 3. Lessons of the Crisis and Regulatory Responses
        4. 4. The Issues for Supervisors
        5. Notes
    12. Part Two: Capital Adequacy
      1. Chapter 13: Risk and the Need for Capital
        1. 1. Introduction
        2. 2. The Evolution of International Capital Standards
        3. 3. The Risk-Based Financial Regulation Approach
        4. 4. Globalisation of Financial Regulation?
        5. 5. The Short-Lived Rise of Contingent Capital Instruments
        6. 6. Conclusion
        7. Notes
      2. Chapter 14: Measuring Risk for Capital Adequacy: The Issue of Profit-Sharing Investment Accounts
        1. 1. Introduction
        2. 2. Why Capital Adequacy?
        3. 3. Application to Islamic Banks
        4. 4. Pillar 2 of the Revised Framework and Risk Management
        5. 5. Concluding Remarks
        6. Note
        7. References
      3. Chapter 15: Measuring Operational Risk
        1. 1. Introduction
        2. 2. Operational Risk in the Context of Islamic Banks
        3. 3. Operational Risk Capital under Basel II
        4. 4. Operational Risk Capital under the IFSB Standard
        5. 5. Industry Practice and Implementation Issues for Operational Risk Measurement
        6. Appendix
        7. Notes
      4. Chapter 16: Liquidity Risk
        1. 1. Introduction
        2. 2. The Regulatory Response to Liquidity Risk
        3. 3. Asset Liquidity
        4. 4. Trade Finance Assets as Liquidity
        5. 5. Government Bonds and Liquidity
        6. 6. Asset-Based Financings and Liquidity
        7. 7. The International Islamic Liquidity Management Corporation (IILM)
        8. 8. Liabilities (Deposits) as Liquidity
        9. 9. Accounting for Liquidity and Fair Value
        10. 10. Islamic Banks and the Basel III Liquidity Measures
        11. 11. Conclusion
        12. Notes
    13. Part Three: Securitisation and Capital Markets
      1. Chapter 17: Securitisation in Islamic Finance
        1. 1. Preface: An Overview of the Sukuk Market
        2. 2. Securitisation and Sukuk: Some General Remarks
        3. 3. Market for Securitisation in Islamic Finance
        4. 4. Securitisation Structures
        5. 5. Regulatory Framework
        6. 6. Securitisation: A Growth Driver for Islamic Finance
      2. Chapter 18: The Role of Capital Markets in Providing Shari’ah-Compliant Liquidity
        1. 1. Liquidity and Its Importance to the Islamic Financial System
        2. 2. Traditional Role of Capital Markets in Providing Liquidity to Financial Systems
        3. 3. Capital Markets—Structure and Analysis
        4. 4. Role of Islamic Capital Markets in Providing Liquidity
        5. 5. Enhancements to the Critical Dimensions of ICM to Improve Its Ability to Provide Liquidity
        6. 6. Products
        7. 7. Players
        8. 8. Infrastructure
        9. 9. Market Segments
        10. 10. Current Trends and Work in Progress
      3. Chapter 19: Regulating the Islamic Capital Market
        1. 1. Introduction
        2. 2. The Applicability of Universal Principles of Securities Regulation
        3. 3. Approaches to Regulating ICM
        4. 4. The Shari’ah Governance Framework
        5. 5. Conclusion
        6. Notes
        7. References
    14. Part Four: Corporate Governance and Human Resources
      1. Chapter 20: Corporate Governance and Supervision: From Basel II to Basel III
        1. 1. Introduction: Corporate Governance and the Special Case of Banks
        2. 2. Regulation and the Corporate Governance of Listed Companies
        3. 3. Basel Pillar 2 and Corporate Governance in Banks
        4. 4. Conclusion
        5. Notes
      2. Chapter 21: Specific Corporate Governance Issues in Islamic Banks
        1. 1. Introduction
        2. 2. Salient Characteristics of Islamic Banks
        3. 3. Corporate Governance Issues in Islamic Banks
        4. 4. Exercising Effective Market Discipline on Islamic Banks
        5. 5. Regulation of Islamic Banks
        6. 6. Concluding Remarks
        7. Notes
        8. References
      3. Chapter 22: Transparency and Market Discipline: Post–Basel Pillar 3
        1. 1. Introduction
        2. 2. Compliance with Pillar 3
        3. 3. Transparency and Market Discipline: Specificities of Islamic Finance
        4. 4. Concluding Remarks
        5. Notes
      4. Chapter 23: Human Resource Management of Islamic Banks: Responses to Conceptual and Technical Challenges
        1. 1. Introduction
        2. 2. Recruitment, Retention, and Qualification of Personnel
        3. 3. Support Infrastructure for Islamic Financial Institutions
        4. 4. Shari’ah-Compliance Issues
    15. Part Five: Conclusion
      1. Chapter 24: Concluding Remarks
        1. 1. Introduction
        2. 2. The Challenge to Financial Sector Industry Regulators and Supervisors
        3. 3. The Challenge to the Islamic Financial Services Industry Sector
        4. 4. The Challenge to Governments and Legislative Authorities
        5. 5. Conclusions
        6. Notes
    16. Index