SYDNEY: The Manila-based Asian Development Bank (ADB) has signed an agreement with the Islamic Financial Services Board (IFSB) to help member countries adopt the IFSB’s prudential standards.
The five-year agreement, signed earlier this week, will see the ADB support member countries in legal and regulatory aspects of meeting the IFSB’s standards, Ashraf Mohammed, assistant general counsel at the ADB, told Reuters.
IFSB guidelines are widely used in the Islamic finance industry, but they are not mandatory – it is up to national regulators to decide whether to adopt them.
“The real test of all this is for financial institutions to apply these standards,” Mohammed said. “We will review mid-term in two years to see how it has been effective.”
At present, the IFSB’s membership of regulatory bodies and private institutions such as banks and law firms is concentrated on more developed countries; the majority of its 187 members come from the Gulf and Malaysia.
In contrast, only seven IFSB members come from Indonesia, Pakistan and Bangladesh, the world’s three most populous Muslim-majority countries. These are some of the countries where the ADB is most active, as its main objective is poverty alleviation.
In the short term the agreement will focus on Indonesia, Bangladesh, Pakistan, the Maldives, Afghanistan, Kazakhstan and the Philipinnes, Mohammed said. Islamic finance can help to bring people in such countries into the banking system, he said.
The agreement includes encouraging countries to align their infrastructure financing needs with Islamic finance, which could help meet Asia’s enormous needs for infrastructure spending, said Bindu Lohani, the ADB’s vice president for knowledge management and sustainable development.
The ADB provided its first fully sharia-compliant financing in May, assisting the Jeddah-based Islamic Development Bank with two partial credit guarantees worth up to $66 million for two wind farms in Pakistan.