PwC Regulators and Islamic Finance in the Middle East Fouad Alaeddin Middle East Managing Partner PricewaterhouseCoopers 2 March 2010

Agenda Areas of Concern to Regulators Why consider Islamic finance in a separate context? Key Milestones to Regulators Suggested Approach What we must consider looking ahead?

PricewaterhouseCoopers March 2010 Slide 3 Key areas of concern to regulators Soundness of system Quality of compliance Moral hazard Financial stability Risks to clients

PricewaterhouseCoopers March 2010 Slide 4 Why consider Islamic finance in a separate context? IFI’s role is usually that of Mudarib or WakeelBusiness model Product offering 2 Clients 3 Markets 4 Based on risk transfer in most cases Clients are not sophisticated Markets are also only evolving Shari’a values 1 Shari’a 5

PricewaterhouseCoopers March 2010 Slide 5 Islamic finance regulation – key milestones Malaysia was one of the first to issue a law on Islamic finance Bahrain issued Amiri decree, amended law and issued separate Rulebook addressing all prudential issues UK, Kuwait, Lebanon, Dubai and Qatar made changes to legal frameworks. Other centres made changes to help grow Islamic finance Following the global crisis and more recent impact on the Middle East region, a number of regulatory initiatives are likely……… 1980s1990sNew millennium2010 and beyond

PricewaterhouseCoopers March 2010 Slide 6 Two broad approaches Understand specificities of Islamic finance, but adopt uniform approach: “Level playing field” and therefore better judge of systemic developments Regulatory arbitrage avoided Does not address all concerns Adopt a separate regime due to the specificities: Better protection for clients and markets Benefit of “proportionality” “Shari’a arbitrage” avoided Does not allow comparability uniform approachtailored approach

PricewaterhouseCoopers March 2010 Slide 7 Case study: UK and Bahrain Section heading goes here No separate regulatory regime in the UK FSA uses the principle of non-discrimination and “level playing field” for all firms Authorisation based on existing frameworks of standards and regulations applicable to all institutions. Shari’a compliance is a matter for the Shari’a scholars Principles and risk based supervision UK Bahrain Over arching principles of business conduct, business standards and risk based supervision principles common to all players Separate regulatory regime for banks, takaful etc. Prudential capital and limits are comparable but addresses specific industry issues Shari’a compliance is a matter for the Shari’a scholars

PricewaterhouseCoopers March 2010 Slide 8 What we must consider looking ahead – key reference points Regulatory governance within regulatory bodies is key Independence and objectivity of the regulatory regime Corporate governance within IFIs Enhanced accountability amongst boards and management Transparency Integrity Shari’a and socially responsible conduct

PricewaterhouseCoopers March 2010 Slide 9 What we must consider looking ahead – some of the building blocks Business model specifics, limits and restrictions Capital adequacy requirements and client losses Asset quality standards Proportional risk and controls architecture Standards of business conduct Governance and Shari’a compliance Liquidity standards

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