Disclosures to Promote Transparency and Market - IFSB

Appendix A
1. Necessary Conditions for an Effective Transparency and Disclosure Regime for
IIFS
78. The concept of transparency is wide-ranging and covers the notions of
accountability as well as the legal and accounting infrastructure for economic decisions.
However, from an operational perspective of a central bank or supervisory authority,
“transparency of an IIFS” refers to an environment where material and reliable
information about the IIFS is made available in a timely and accessible manner to the
market at large and to all stakeholders. Such transparency can reduce asymmetric
information and uncertainty in financial markets.
79. “Market discipline” refers to those environmental features, which, in response to
the disclosure of material information, elicit prompt adjustments in either prices or
quantities of financial positions in the IIFS, and thereby provide incentives for IIFS to limit
excessive risk-taking and to pursue good governance. Market discipline, in this sense,
requires a set of mechanisms through which markets can penalise excessive risk-taking
or inadequate transparency.
80. The transmission mechanism by which information disclosure can act as a trigger
for improved risk management and better governance by IIFS depends, however, on the
availability of certain infrastructure components that can facilitate adequacy and reliability
of information, and that can affect the incentives and capacity of various stakeholders to
process and act on the information. These infrastructure components include:
the accounting and auditing standards and the environment that govern the reliability
of information disclosed;
the availability of markets in which IIFS issue instruments;
an effective market microstructure that determines price discovery and the efficiency
with which available information is translated into asset prices;
a corporate governance framework for IIFS that provides incentives for both the
stakeholders and management to act on the information;
the availability of external credit assessment institutions (ECAI) or rating agencies
and other information service firms that help to process and analyze available
information;
investor education programmes to facilitate proper investment decisions, and to
serve as an additional tool for investor protection; and
legal and institutional arrangements for investor rights and investor protection, and
the transparency of these arrangements. 58
81. Several of these infrastructure components also serve as necessary conditions
for effective supervision generally, and not just for strengthening market discipline, and
hence have close links to Pillar 2 of Basel II and the related IFSB document. 59 The
infrastructure elements are further explained below.
58 Good practices in financial policy transparency are presented in the International Monetary Fund’s (IMF) Code of
Good Practices in Monetary and Financial Policy Transparency, September 1999. Such transparency can affect
the incentives to monitor, and the capacity to influence, IIFS, thereby supporting good corporate governance.
59 IFSB Guidance on Key Elements in the Supervisory Review Process for Institutions Offering Islamic Financial
Services, December 2007.
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