The Islamic Financial Services Board

The IFSB, which is based in Kuala Lumpur, was established in 2002 and funded by 45 central banks. It serves as an international standard-setting body of regulatory and supervisory agencies that have a vested interest in ensuring the soundness and stability of the Islamic financial services industry (banking, the capital market, and insurance). The IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Shari'ah principles and recommending them for adoption. The work of the IFSB complements that of the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors.

As of August 2010, the 195 members of the IFSB comprised 52 regulatory and supervisory authorities; 6 international intergovernmental organizations; and 137 market players, professional firms, and industry associations operating in 40 jurisdictions.

Drafting of standards in IFSB is done by a task force or working group. The IFSB council appoints members of a technical committee who are responsible for advising the council on the technical issues within scope. The Islamic Development Bank's Shari'ah supervisory board is responsible for the Shari'ah supervision of IFSB's standards. There are currently six Shari'ah scholars on this committee.

The following three standards of the IFSB affect sukuk's issuance, trading, and investing:

1. IFSB-1. Guiding principles of risk management for institutions (other than insurance institutions) offering only Islamic financial services, issued in December 2005. This guideline includes the various risk elements affecting institutions offering investment certificates such as sukuk and the operational consideration regarding them. This guideline offers a general perspective on risk sources and risk management and is not specific for sukuk.

2. IFSB-2. Capital adequacy standard for institutions (other than insurance institutions) offering only Islamic financial services, issued in December 2005. This standard is an overview of the various Islamic contracts (some of which are underlying contracts of sukuk) and provides capital requirement for each.

3. IFSB-7. Capital adequacy requirements for sukuk, securitizations, and real estate investment, issued in January 2009. The first part of this guideline investigates the sukuk and its securitization; sukuk structures; the operational requirements pertaining to sukuk; the treatment, for regulatory capital purposes, of sukuk and securitization exposures; and the treatment of credit risk exposures of sukuk.

The International Islamic Financial Market

The IIFM, located in Bahrain, is a global standardization body for the Islamic capital and money market segment of the Islamic financial services industry. Its primary focus is the standardization of Islamic products, documentation, and related processes. The IIFM was founded with the collective efforts of Central Bank of Bahrain, Bank Indonesia, Central Bank of Sudan, the Labuan Financial Services Authority (Malaysia), the Ministry of Finance of Brunei, and the Islamic Development Bank (a multilateral institution based in Saudi Arabia).

The IIFM is also supported by its permanent members: State Bank of Pakistan and the Dubai International Financial Centre Authority (UAE). The IIFM is further supported by a number of regional and international financial institutions and other market participants as its members. IIFM activities are under supervision of its Shari'ah advisory panel, which currently has 10 members.

The focus of the IIFM's work is Islamic capital and money markets. Currently, the IIFM has no specific standard or guideline pertaining to sukuk. However, it released a report on sukuk in 2010 in which it investigated the current sukuk market from an international and a domestic perspective. It investigated various sukuk structures for international issues and studied some sukuk issues as case studies.


The scrutiny of the regulatory process applied to cases examined in this chapter provides additional information to the conclusions in Chapter 4. The sukuk markets are remarkably different in design, contracting, and practice. No wonder their yields are significantly different as well. Although securitization may share features with conventional bond issuance, there are significant differences in the initial public offering process of this whole new form of debt contracting. This chapter expanded this theme to show that the regulatory process also differs from that applied to conventional bonds.

Conventional bond issues are general-purpose funding contracts (despite the prospectus indicating the intended use of the proceeds). The regulatory process is much simpler for this huge market for funds. The sukuk bond market is no more than 1 percent of the world market for bonds. As emphasized in an earlier chapter, sukuk funding is targeted funding for specific aspects of the producer's funding needs. This introduces complexity in the design of sukuk products. By necessity the regulatory process is much more onerous than is the case for conventional bond design, issue, sale, and listing. This fundamental difference makes sukuk bonds very different from conventional bonds for regulatory purposes.

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