Disclosures to Promote Transparency and Market - IFSB

86. When information on the soundness of an IIFS and its counterparties is promptly
reflected in the prices of the IIFS’s securities that are traded (for example, an IIFS’s
issued equity or Sukūk), or in the prices of claims on major IIFS counterparties, such
price information can provide signals that permit the holders of such instruments to
intervene and demand management changes. An aspect of this form of market discipline
is the existence of a well-functioning market for corporate control, which can facilitate
takeovers of financial firms for the purposes of restructuring. Forward-looking market
price signals can also complement the information on an IIFS’s risk profile and
soundness relied upon by supervisors that will trigger timely action to reduce risks or
raise capital. Thus, market price developments can both complement and facilitate
effective supervision.
87. Even if markets provide good signals, their effect on IIFS’s behaviour depends
upon the incentive structures and governance mechanisms that enable stakeholders to
exert pressure on the Board, in turn resulting in actions by management to behave
prudently. Thus, well-designed corporate governance mechanisms for IIFS serve as key
factors in making market discipline effective.
1.3 Availability of external credit assessment institutions and other information
service firms (investment advisors, investment research firms, credit bureaus, etc)
can facilitate effective disclosures and enhance market discipline.
88. Such institutions can help to assimilate and synthesise available disclosures in
order to provide ratings of obligors and instruments, indicate changes in ratings due to
new information, and summarise and assess risk-return information for the benefit of
investors. The availability of ECAIs that can consider the specific operational features of
Islamic finance instruments is also an important requirement for the application of the
Standardised Approach to capital adequacy under the IFSB’s Capital Adequacy Standard
for IIFS.
89. Appropriate measurement and disclosure of credit and equity risks in various
Islamic finance facilities can be achieved from institutional arrangements for systematic
data collection, including establishing credit (and equity) registries. Such registries for
Islamic finance facilities can be developed by including Sharī`ah-compliant financing
contracts in existing credit registries or by developing registries specifically for Sharī`ahcompliant
contracts. Appropriate adaptations of credit registries can help in strengthening
credit risk measurement, which is needed in order to adopt the advanced capital
measurement approaches and associated disclosures envisaged in the new Basel
Capital Accord.
1.4 A programme of investor and stakeholder education, and more broadly,
consumer education, contributes to investor protection and stakeholder
awareness, and enhances market discipline through better-informed investment
and financing decisions.
90. Investor (and consumer) education can be seen as a tool to enable investors to
understand better both the returns and the risks from various financial products, and to
help make investment and financing decisions that best suit their circumstances and the
needs of the IIFS’s counterparties. Investor education is not a substitute for effective
supervision, or for properly tailoring the disclosures to the type of counterparty.
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