Regulation of Islamic financial institutions needs improvement, says IDB Institute


TEMPO.CO, Durham – The regulation and supervision of Islamic financial institutions (IFIs) must be continuously improved, according to the Islamic Development Bank (IDB) Institute. Research conducted by the IsDB Institute shows the attitude of IFI stakeholders who mostly believe that the regulatory and supervisory framework for risk mitigation for IFIs is sufficient. However, the room for improvement continues to increase, particularly in several important areas.

“There is a need to create risk management guidelines that can capture the Shariah aspects of the various risks that may arise in the activities of IFIs,” said Hylmun Izhar, Senior Economist of the IDB Institute, during the meeting. Durham Islamic Finance Summer School (FIFSS) event, 29 July 2022, at Durham University, UK. Hylmun also added that there is a need to provide an articulation where risk management can be translated into products at the application level.

Based on data from the Islamic Finance Development Report 2020, the total assets of IFIs in 2019 reached US$2.875 trillion and are expected to increase to US$3.6 trillion by 2024. Of this amount , Islamic banking accounts for almost 70% of total assets, the rest came from sukuk (19%), non-banks (5%), mutual funds (5%) and takaful (2%) .

Hylmun explained two conditions for achieving financial stability in Islamic banking and finance. First, to have effective regulation and supervision. “This includes the need for Islamic banking and financial institutions to comply with Sharia principles. Therefore, the Shariah supervisory board becomes important as a determinant of ensuring that the policies and activities carried out comply with Shariah principles.

Second, the need to emphasize the prudent side of risk management. For this reason, Hylmun continued, there is a need to improve the governance of Islamic banking and financial institutions. “Careful risk management will increase immunity and reduce the risks associated with uncertainty,” said Hylmun, the third person from Indonesia to receive international awards after President Jokowi and Vice President KH Ma’ruf Amin during the Global Islamic Finance Award, in Astana, Kazakhstan, this 2017.

UIII Delegation

This year’s DIFSS event, which took place over a week at Durham University’s School of Business, brought together 55 participants from around the world in a variety of roles as practitioners, academics, regulators (central banks) and policy makers. . The DIFSS has been organized since 2006. The International Islamic University of Indonesia (UIII) sent a delegation consisting of 3 students and a teacher. The Head of the UIII Delegation, Mr. Luthfi Hamidi, explained that currently, the UIII has a preoccupation with the international community in conducting research activities in the field of Islamic finance that are aligned with the aspirations of the Sustainable Development Goals (SDGs). “Together with IDB and UNDP, we have established a Joint Study Centre. The hope is that Islamic finance and banking will increasingly contribute to activities that support long-term sustainability. In its implementation, Islamic banking should be more deeply rooted and show a better role in empowering the community and also in preserving the environment.

On the same occasion, Muhammad Ismail Sunni, a FEB UIII student who is also one of the UIII delegates, expressed his belief that Islamic finance is not just a theory. “Before, I saw that Islamic finance and banking products were less competitive and the standard regulatory framework was not as clear as conventional frameworks. But in general, from the presentations of various international speakers here, the common thread is how Islamic finance and banking can empower people and improve their social lives and does not always lead only to the pursuit of profit” , said Muhammad Ismail Sunni.


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