Islamic Finance: The New Regulatory Challenge, 2nd Edition

Chapter 12

Supervisory Implications for Islamic Finance: Post-Crisis Environment

Peter Casey

Dubai Financial Services Authority

1. REGULATION AND SUPERVISION

This chapter discusses the implications for supervision of the risks involved in Islamic finance, with a particular focus on Islamic banking and developments since the financial crisis. It covers takaful to a limited extent only.1 In so doing, it is necessary to keep in mind the distinction which some draw between supervision and regulation. Where this division is drawn, “regulation” means the process of creating a set of laws and rules applicable to the activity in question; “supervision” means ensuring that those laws and rules are complied with, currently and prospectively. It is in essence the distinction between the activities of the legislator and the policeman. This is to some extent a caricature, because good supervisors are rarely driven solely by rules and, conversely, rules are commonly written in broad terms, allowing supervisors considerable latitude. On the other hand, the scope of supervision is always constrained by rules, if only by the broad objectives and responsibilities assigned to the supervisory authority. The boundary issue is further confused by the fact that the supervisor may itself be the rule maker, to a greater or lesser degree. Nevertheless, its scope of action will be at least partly constrained by external legislative provisions, and generally also by process requirements.

2. SUPERVISORS AND ...