Regulation of Islamic Financial Institutions Needs to be Improved, Says IsDB Institute

TEMPO.CO, Durham - Regulation and supervision of Islamic Financial Institutions (IFIs) need to be continuously improved, according to the Islamic Development Bank (IsDB) Institute. Research conducted by the IsDB Institute shows the attitude of stakeholders in IFIs who mostly believe that the regulatory and supervisory framework for risk mitigation for IFIs is sufficient. However, the room for improvement continues to be increased, especially in several important issues.

"It is necessary to create risk management guidelines that can capture the Sharia aspects of various risks that can arise in IFIs activities," said Hylmun Izhar, Senior Economist IsDB Institute, at the Durham Islamic Finance Summer School (FIFSS) event, 29 July 2022, at Durham University, UK. Hylmun also added that it is necessary to provide an articulation where risk management can be translated into products at the application level.

Based on data from the Islamic Finance Development Report 2020, the total assets of IFIs in 2019 reached US$2.875 trillion and is estimated to increase to US$3.6 trillion by 2024. Of this amount, Islamic Banking accounts for almost 70% of total assets, the rest came from sukuk (19%), non-banks (5%), Mutual Funds (5%), and Takaful (2%).

Hylmun explained two conditions for achieving financial stability in Islamic banking and finance. First, have effective regulation and supervision. “This includes the need for Islamic banking and financial institutions to be in accordance with Sharia principles. Therefore, the Sharia Supervisory Board becomes important as a determinant of assurance that the policies and activities carried out are in line with Sharia principles.”

Second, the need to emphasize the prudent risk management aspect. Because of this, continued Hylmun, it is necessary to improve the governance of Islamic banking and financial institutions. "Prudent risk management will increase immunity and reduce risks from uncertainty," said Hylmun, the third person from Indonesia to receive international awards after President Jokowi and Vice President KH Ma'ruf Amin in the Global Islamic Finance Award, in Astana, Kazahstan, this 2017.

UIII Delegation

This year, the DIFSS event which took place for a week at Durham University's School of Business, was attended by 55 participants from around the world in various capacities as practitioners, academics, regulators (central banks) and policymakers. DIFSS has been conducted since 2006. The International Islamic University of Indonesia (UIII) sent a delegation consisting of 3 students and one lecturer. The Head of the UIII Delegation, M. Luthfi Hamidi explained that currently UIII has a concern with the international community in conducting research activities in the field of Islamic finance that is aligned with the aspirations of the Sustainable Development Goals (SDGs). “Together with IsDB and UNDP, we have created a Joint Study Center. The hope is that Islamic finance and banking will increasingly contribute to activities that support long-term sustainability.” In its implementation, Islamic banking must be more deeply rooted and show a better role in community empowerment and also in environmental conservation.

On the same occasion, Muhammad Ismail Sunni, a student of FEB UIII who is also one of the delegates from UIII, expressed his belief that Islamic finance is not just a theory. “Before I saw that Islamic finance and banking products were less competitive and the standard regulatory framework was not as clear as conventional ones. But in general, from the presentations of various international speakers here, the common thread lies in how Islamic finance and banking can empower people and make their social lives better and not always lead only to pursue profit," said Muhammad Ismail Sunni.

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