Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Way Forward 4715. Increasing the amount of information available to the investors to reduce the adverseselection and moral hazard problems in financial markets.6. Enforcing prudential rules and regulations, keeping in mind proper risk managementand the needs and nature of the new system.7. Ensuring that the risks relating to current accounts, which are a liability for the IFIs, areborne by the banks themselves and not transmitted to investment accounts, particularlywhen the bank is in distress.8. Vigorous training of concerned central bank staff, enabling them to effectively superviseand guide the IFIs.9. Establishment of a research and training centre for banking regulations, supervision andeducation.10. Rating institutions and feasibility study institutions with specially trained incumbentsare the infrastructure of the new system that should be provided.Protecting the rights of the depositors is said to be the foremost important objective ofregulators all over the world, as per their vision and mission statements. However, practically,the situation is the reverse. Working in the “capitalist” structure, the regulators/central banksin almost all economies where the financial sector has been “liberalized” do not intervene inthe rate structures of financial services, while actually they need more intensive supervisionin order to protect the depositors and entrepreneurs from possible exploitation by financialinstitutions working with the motto of “self-interest” and maximization of their net profits.The free market policy has become a source of injustice and exploitation of the clients both ofconventional and Islamic banks. As banks’ income increases, they should pass on a fair partof their income to the depositors. Practically, however, only the spread has been increasing.There is a need for proper vigilance by the regulators, particularly for IFIs, because theirdepositors have to bear additional risks.Keeping in mind the possibilities of business failure, some customers of IFIs may not beable to pay their liabilities in time. Sharī´ah scholars have allowed the receipt of additionalamounts for charity in order to discipline customers. But the IFIs must differentiate betweenthe wilful defaulters and those who are really in trouble. For this purpose, the regulatorsmay introduce some parameters to ensure that while solvent/wilful defaulters are chargedheavily to create a deterrent for others, those who are in genuine difficulties and unable topay their liabilities are given respite without any charge or fine. A well-thought-out systemfor restructuring the liabilities of such insolvent customers and for helping them in revivalof their business has to be an important part of the regulatory set-up for Islamic finance.For an effective Sharī´ah compliance mechanism, regulators may enlist Sharī´ah advisorswith the appropriate entry qualifications and skill sets. If necessary, central banks may liketo help train Sharī´ah scholars to improve their understanding of finance and skills forenhancing their practice-oriented knowledge.Regulations are also needed for transparent and proper disposal of charity amounts fromthe Islamic banks, keeping in mind the principles of charity in the Sharī´ah. In addition togeneral heads to dispense charity funds, rules can be provided on the basis of nonremunerative(e.g. current accounts) deposits and the level of net earnings of the IFIs, in terms of whichsome funds might be used for grants or return-free loans to the poor and the needy, likestudents belonging to low-income groups, widows, the sick and other destitute membersof society. For this purpose, IFIs can also be required to contribute from the shareholders’income. Regulators may ensure that Islamic banks do not spend lavishly on unnecessary