The official “acceptance” of Islamic banking by the International Monetary Fund (IMF) through the formal recognition of “Core Principles for Islamic Finance Regulation (CPIFR)” – Gulf Times reported on May 29 – has been welcomed as great news for the Islamic finance industry and a big step forward towards the creation of comprehensive regulation and supervision of Islamic banks worldwide.
“The CPIFR will complement the international architecture for financial stability, while providing incentives for improving the prudential framework for Islamic banking industry across jurisdictions,” the IMF said in an official statement.
However, what does the endorsement include? Where does it apply? And does it have any immediate implications for Islamic banks?
First of all, the IMF points out that the CPIFR clearly has a macro-financial approach to supervisory standard assessments, which means that it aims at developing globally coherent standards for the industry, and any internationally operating Islamic bank that wants to obtain an IMF assessment – and most of them, if not all would want that – would have to play by the rules.
The IMF said that CPIFR will be applied in countries with Islamic banking assets accounting for 15% or more – as per IMF data, this currently includes four Gulf countries, Saudi Arabia, UAE, Qatar and Kuwait, as well as Iran, Sudan, Yemen, Jordan, Mauritania, Bangladesh, Djibouti, Malaysia and Brunei, while Oman, Nigeria, Pakistan and Indonesia are under observation as they are expected to reach that market share in the near future. It will apply to both fully-fledged Islamic banks and such with Islamic windows. 
According to latest IFSB data, the number of fully-fledged Islamic banks and Islamic windows of conventional banks in 20 countries stood at 178 and 84, respectively, as of the third quarter of 2017. Total assets amounted at $1.66tn, up 8.6% from end-2016.
The CPIFR and the subsequent regulations for the observance of standards and codes in Islamic banking were essential “for both fully Islamic banking systems as well as systemically significant Islamic banking systems in dual banking markets,” says Bello Lawal Danbatta, secretary-general of Kuala Lumpur-based Islamic Financial Services Board (IFSB), which jointly developed the CPIFR with the IMF.
He added that the CPIFR would “complement the international architecture for financial stability, provide incentives for improving the prudential framework for Islamic banking industry across jurisdictions, while jurisdictions might need assistance to enhance their capabilities to identify and monitor emerging risks, to understand the linkages that might exist with other sectors.”
In a nutshell, now that Islamic banks play a more complex role in a sustainably expanding industry and have reached a size critical for the international financial sector as a whole, they will eventually have to adapt to the new systemic standards. This includes higher and better quality capital and liquidity buffers for Islamic banks and Islamic financial service providers, an increased focus on supervisory processes and stress testing exercises and compliance to Basel and other international standards in both banking and insurance.
Aside from requirements related to general corporate governance, credit risk, capital adequacy and liquidity, handling of problem assets, transactional and other market and operational risks, the CPIFR will also set standards for balance sheets of Islamic banks and supervise coherent standards in five new key areas, namely the risk management of profit-sharing investment accounts, a bank’s Shariah governance framework, the management and supervisory of equity investment risks, the rate-of-return risk to reduce uncertainty of investment returns, as well as governance issues related to Islamic windows operations.