Khalid Hamad, Executive Director - Banking Supervision, CBB; Chairman, International Islamic Financial Market, on the regulatory framework: Viewpoint

Khalid Hamad, Executive Director - Banking Supervision, CBB; Chairman, International Islamic Financial Market

The 2008-09 financial crisis threatened the stability of the global banking system, and central banks across the world were forced to take unprecedented measures to stabilise the situation and to provide a safe operating environment for the financial industry. Financial regulators still have to deal with many issues to ensure that the new regulations provide a foundation for financial stability and sound operational practices, while ensuring fairness and transparency. This focus for regulators does and will continue to include fine-tuning existing banking rules and regulations, as challenging economic and financial conditions evolve. We hope that the bitter experience that the world has undergone shall bring about the adoption of new practices that emphasise integrity and social responsibility for all banking transactions, including improving corporate governance and risk management practices.

In this context, the Central Bank of Bahrain (CBB) has sought to improve the regulatory framework for the financial services industry in Bahrain by implementing international standards. We seek to implement best international practices, especially those related to governance and risk management. In this respect, the CBB has issued many updates to the rulebooks in order to continuously maintain and improve the stability of the banking sector. The CBB has also encouraged bank consolidation, which has resulted in the mergers of 10 banks to date, creating stronger and better-capitalised institutions. The next strategic subject of importance to the CBB is the ongoing strengthening and development of Islamic finance.

Our strategy for Islamic finance has four parts: consolidation, regulation, human capital development and the enhancement of market practices. Firstly, with regard to regulations, we are introducing a new solvency framework for takaful(Islamic insurance), new sharia governance rules to complement standards of the Accounting and Auditing Organization for Islamic Financial Institutions, and new business and market conduct rules to protect account holders and depositors. Rules designed to enhance the independence of risk managers, compliance officers, internal auditors, internal sharia reviewers and anti-money laundering officers are also being implemented. Lastly, new rules are being established to address technical aspects of sharia compliance for public and private securities.

On the subject of human capital development, the CBB, the Waqf Fund and the Bahrain Institute of Banking and Finance (BIBF) provide training for the Islamic finance industry. The CBB has issued new modules on training and competency requirements for senior positions in licensees, including board members. These new rules require an increased level of knowledge, skills, and experience for those who hold senior positions. The Waqf Fund continues to provide financial support for training and development programmes. The BIBF, meanwhile, is offering respected academic and professional training. Finally, for market practice enhancement, the CBB has advised all Islamic banks to seek rating. The Waqf Fund, in consultation with the CBB and the industry, has started to review practices on internal sharia review, internal sharia audit and, most importantly, external sharia audit to improve consistency and transparency. The CBB requires compliance with sharia principles and full disclosure of assets and liabilities that are not sharia compliant. Finally, the CBB has urged Islamic banks to use standard documentation from the International Islamic Financial Market on unrestricted wakalah(contract of agency) transactions as a replacement for commodity murabaha (fiduciary sale).

Our commitment to Islamic finance remains strong, and we continue to work with the industry to ensure progress. Our framework for implementation of Basel III continues with a revised capital adequacy module. Underpinning all of this are our recommendations for improving corporate governance. We have a challenging time ahead and by building a strong regulatory framework based on international standards and best practices, with our partners in the financial services sector we can maintain a safe working environment.

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Khalid Hamad

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