What Is the Islamic Financial Services Board (IFSB)?
The Islamic Financial Services Board (IFSB) is an international standard-setting organization that promotes the soundness and stability of Islamic banking by issuing global prudential standards and guiding principles in the areas of capital adequacy, corporate governance, risk management, and transparency, among others.
- The Islamic Financial Services Board (ISFB) is an organization that sets and promotes the tenets of Islamic banking by issuing standards and principles.
- Islamic banking adheres to shariah law, which are the principles of the religion of Islam, and is different in many ways from how business is conducted in the west.
- Shariah law prevents charging interest for borrowed money as well as taking part in any speculative ventures.
- The IFSB is a large organization body based in Malaysia with 188 members globally, which includes financial institutions, stock exchanges, and industry associations.
Understanding the Islamic Financial Services Board (IFSB)
The Islamic Financial Services Board (IFSB) is based in Kuala Lumpur, Malaysia, and began operations in early 2003. It was founded by a consortium of central banks and the Islamic Development Bank, with the goal of promoting the awareness of issues that could have an impact on the Islamic financial services industry. It issues Sharia-compliant standards, holds conferences and seminars, and provides guidance and supervision, among other initiatives.
While IFSB standards are mainly concerned with the identification, management, and disclosure of risk related to Islamic financial products, another Islamic financial standards organ, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), sets best practices for handling the financial reporting requirements of Islamic financial institutions.
The ISFB consists of:
- The general assembly, which includes all members of the ISFB
- The council, which acts as the policy-making body of the IFSB and includes the senior executive of each full member of the organization
- The executive committee that advises the council on operational and administrative matters
- The technical committee, which advises the council on issues and consists of up to 30 persons appointed by the council
- The working group, which drafts standards and guidelines and reports to the technical committee
- The task force that manages ad-hoc activities.
- The Arabic Editing committee that translates ISFB documents from Arabic into English
- The secretariat, which acts as the permanent administrative body and is headed by a secretary-general appointed by the council
Islamic Financial Services Board (IFSB) Membership
As of December 2020, the IFSB had 188 members, which consists of 80 regulatory and supervisory authorities, 10 international inter-governmental organizations, and 98 market players that consist of financial institutions, professional firms, industry associations, and stock exchanges.
There are three types of memberships that an entity can apply for: full membership, associate membership, or observer membership. Benefits to membership include receiving technical assistance, voting in the General Assembly, participating in workshops, roundtables, seminars, and conferences, and access to events and meetings.
The need for the Islamic Financial Services Board (IFSB) arises from Islamic banking, which is banking and other financial services that adhere to the religion of Islam. This is known as prescribing to shariah law. There are certain tenets to shariah law that make Islamic banking vastly different from the traditional ways of banking; those that are commonly associated with the west.
These differences create the need for a body such as the IFSB to implement, update, and monitor Islamic banking standards around the globe, particularly in a time when Islamic banking, mainly from the Middle East, has become so prominent. Wealthy Islamic countries, such as the United Arab Emirates and Qatar, conduct significant business with western countries and must adhere to shariah law and this needs to be conveyed and complied by with western firms as well.
The main aspects in Islamic law that require attention are the prohibition of charging interest on borrowed money, involvement in businesses that go against Islamic law, such as gambling and alcohol, and business practices that are uncertain. Therefore, uncertainty, and gambling for that matter, would prohibit any speculative trading, where the future outcome is not known.
Islamic banking has found ways around shariah law, for example, interest is included as part of the overall price of a transaction or is conducted through equity sharing plans.