IFSB (Islamic Financial Services Board)

The IFSB (Islamic Financial Services Board) is an international standard-setting organization, based in Kuala Lumpur, Malaysia, that issues prudential and supervisory standards and guiding principles for the Islamic financial services industry. Its remit covers Islamic banking, Islamic capital markets and takaful (Islamic insurance). Its role for Islamic finance is often compared to that of the Basel Committee on Banking Supervision for conventional banks.

The IFSB's members are mainly central banks and financial regulators, which adopt its standards into their own national rules. Its standards are not binding in themselves; they take effect only when a member authority implements them.

The IFSB was established in November 2002 and began operations in March 2003. Its founding members included a number of central banks and monetary authorities from countries with significant Islamic finance sectors, with the support of the International Monetary Fund and the Islamic Development Bank. Malaysia hosts the organization under legislation that grants it the status of an international body, and Bank Negara Malaysia played a leading role in its creation.

The IFSB was created because conventional prudential standards did not fit the risk profile of Islamic institutions. Profit-sharing investment accounts, asset-based financing and Sharia governance raise questions that Basel standards did not address directly.

The IFSB is governed by a council made up of representatives of its full members, which are regulatory and supervisory authorities. Its technical work is overseen by a technical committee and carried out by working groups drawn from member authorities, supported by a secretariat in Kuala Lumpur. Membership categories also include associate members and observers, such as international organizations, including the Bank for International Settlements and the World Bank, and industry participants. Standards are issued after public consultation.

The IFSB publishes standards, guiding principles and technical notes covering:

• Capital adequacy: its capital adequacy standards adapt the Basel framework, including Basel III, to Islamic contracts such as murabaha, ijarah, musharakah and sukuk, setting how much regulatory capital must be held against each.
• Risk management: one of its earliest standards set out guiding principles of risk management for institutions offering Islamic financial services, including credit, market, liquidity, operational and rate-of-return risk.
• Sharia governance: guidance on the role and independence of the Sharia supervisory board and on managing Sharia non-compliance risk.
• Takaful and retakaful: governance, solvency and conduct standards for takaful operators and retakaful.
• Islamic capital markets, liquidity management and disclosure, including guidance on Islamic windows of conventional banks.

The IFSB also publishes an annual Islamic Financial Services Industry Stability Report and compiles prudential and structural indicators for the industry across member jurisdictions.

The IFSB is frequently confused with AAOIFI, the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions. The two bodies are complementary. AAOIFI sets accounting, auditing, governance and Sharia standards, defining how Islamic contracts must be structured and reported. The IFSB sets prudential and supervisory standards, defining how regulators should measure and control the risks those contracts create. A regulator may adopt AAOIFI's Sharia standards and the IFSB's capital standards at the same time.

IFSB standards have shaped the prudential rules for Islamic banks in Malaysia, the Gulf states, Pakistan, Indonesia, Turkey and several African jurisdictions, among others. Implementation is uneven: some members adopt standards in full, others selectively, and some major markets rely mainly on general banking rules. Because Islamic finance remains concentrated in a limited number of countries, the IFSB's standards carry less global weight than those of the Basel Committee, but they are the main reference point for supervisors seeking to treat Islamic institutions consistently with their conventional peers.

• Islamic Financial Services Board official website