Global consensus crucial for effective Islamic deposit insurance systems
Jun 18, 2021
Understanding the key elements of effective Islamic deposit insurance systems (IDIS) and how they reflect issues specific to Islamic banking is crucial for deposit insurers in their efforts to promote stability and resilience in the Islamic financial services industry.
The congregation of members of the International Association of Deposit Insurers (IADI), Islamic Financial Services Board (IFSB) and Arab Monetary Fund (AMF) on 2 June 2021 via webinar, discussed the salient features for effective IDIS vis-à-vis the Core Principles for Effective Deposit Insurance Systems that are applicable to conventional systems. Insights on how the general and specific approaches of such features serve as a benchmark for the further integration of Islamic deposit insurance with the international architecture for financial stability were also shared.
One of the panel presenters, Mohd Sobri Mansor, Head of Perbadanan Insurans Deposit Malaysia (PIDM)’s Shariah and Sustainable Development Unit, presented the salient features of effective IDIS in terms of cross border issues and the deposit insurer's role in contingency planning and crisis management, in particular those that are due to the specificities of Islamic banking and IDIS.
Sobri highlighted that, where there is a material presence of foreign Islamic banks in a jurisdiction, the deposit insurers need to clarify the coverage for Islamic deposits, including investment accounts. This is critical since the Shariah interpretations on the coverage between a home and host jurisdiction could be different.
Sobri also pressed on the importance of Shariah compliant contingency planning and crisis management for deposit insurers, as this would ensure the effective response to risks and actual events of Islamic bank failures. Shariah compliance can be ensured through a comprehensive and properly functioning Shariah governance system.
Other key takeaways from the webinar are:
The Islamic financial services industry has seen rapid growth in recent years, extending beyond Muslim-majority economies. It is present in over 80 countries and sees an annual growth rate of between 10 and 20%.
- An IDIS has the potential to promote stability and resilience in the Islamic financial services industry by enhancing depositor confidence.
- There is a need to protect the interest of depositors in countries where a failure of an Islamic bank can have a significant impact to the overall financial system.
- In a failure scenario, measures taken by the deposit insurer for a failed Islamic bank must continue to be in line with Shariah principles.
The development of core principles for an effective IDIS builds upon the existing IADI Core Principles for Effective Deposit Insurance Systems and will, once completed, provide guidance for the development and implementation of an effective IDIS.
Likewise in Malaysia, the implementation of the IDIS runs in tandem with the Conventional Deposit Insurance System to provide a comprehensive financial safety net to all eligible depositors. Both systems are administered by PIDM.
The webinar was attended by over 100 representatives from deposit insurance organisations and multilateral institutions worldwide.