What it means
Islamic finance follows rules based on Islamic law, such as the ban on charging or paying interest and the requirement that financing be linked to real assets or shared risk. These differences mean that standard banking regulations do not always fit.
The IFSB, based in Kuala Lumpur, Malaysia, creates standards that fill this gap. Its members include central banks and regulators, as well as international organisations and some industry firms.
The board issues guidance on topics such as capital adequacy, risk management, governance and disclosure. Each country then decides how to adopt the guidance in its own rules,, so the same standard can look slightly different in different places.
The work matters for business because Islamic financial products are used well beyond Muslim-majority countries. A company arranging a sukuk (an Islamic bond backed by assets rather than a promise to pay interest) or taking Islamic financing relies on the stability of a system that regulators understand.
Clear standards help investors and lenders judge the risk. The IFSB is often mentioned together with other bodies.
The Basel Committee sets standards for conventional banks, and the IFSB adapts similar thinking for Islamic institutions, while the AAOIFI focuses on accounting, auditing and Shariah governance standards. The two Islamic bodies cover different areas, which is why both are cited.
For a non-specialist, the practical point is that compliance with these standards is a sign of quality. A bank that follows them is easier to compare with its peers, and its financial statements are easier for outsiders to understand.
Differences between countries remain, so details still need to be checked locally. The board also runs research projects, training programmes and surveys of the industry, which give regulators a way to share experience.
Its stability reports track how Islamic banks, insurers and funds are performing, and these are a useful starting point for anyone sizing up the sector.
In practice
Real-world examples.
Example
A central bank in a Gulf country is writing rules for its new Islamic banking sector. Its supervisors use IFSB guidance on capital adequacy as a starting point and adjust it to local conditions. Banks then know what is expected of them, and the regulator can explain its choices by pointing to an international reference rather than inventing every rule from scratch.
Example
A manufacturing company plans to raise $50,000,000 through a sukuk. Its adviser explains that investors will look at whether the issuer and the market follow recognised standards, and points to the IFSB's role in governance and risk management. The company prepares disclosures with those expectations in mind. It also asks its legal team to confirm that the structure suits the investors it wants to attract.
Example
A financial journalist writing about a new Islamic bank in Africa checks that its regulator has adopted the board's standards, and she asks the bank how it measures its capital against them. The reference helps her explain to readers how the bank's risk controls compare with those in other countries. She also notes where the regulator has gone further than the standard asks.
Case study
Seen in the real world.
Crescent Horizon Bank is a fictional Islamic bank preparing to expand into a neighbouring country. Its risk director reviewed the local regulator's rules and found they were based on IFSB standards, which matched the bank's existing capital and governance approach.
Because the frameworks were similar, the bank needed few changes to its reporting. It spent its effort on local legal and tax questions instead, and the licence application moved ahead faster than the leadership had expected. The bank's chief executive later said the shared framework had saved months of back and forth with supervisors.
In this illustrative case the shared standards lowered the cost of expansion. The board noted that common rules also made it easier to explain the bank's strength to international investors and rating agencies, and the cost of capital for the new subsidiary was slightly lower as a result.
Watch out
Common mistakes.
- Assuming the IFSB regulates banks directly, when it sets standards that national regulators choose whether to adopt.
- Confusing it with AAOIFI, which focuses on accounting, auditing and Shariah governance rather than prudential rules.
- Believing Islamic finance has no regulation, when many countries apply detailed supervision based on international standards and independent Shariah oversight.
Questions
People also ask.
What does the IFSB do?
It issues prudential standards and guidance for the Islamic financial services industry and supports regulators with research, training and regular reports on how the industry is performing.
Where is it based?
It has its headquarters in Kuala Lumpur, Malaysia.
Does a company need to follow IFSB standards directly?
Not directly, but its regulator may apply them, and following them is a sign of sound practice that investors and rating agencies tend to notice.
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