The start of the 1930s marked the beginning of the Great Depression in the United States and elsewhere. The collapse of the Bretton Woods System in the early 1970s was followed by even bigger economic and financial crises. Since then, the continuous rise of financial globalisation has increased volatility in the global economic and financial system. The 1980s, 1990s and, recently, 2008–9, saw frequent banking and financial crises in diverse regions globally. The aftermath of these crises in the form of banking sector failures has led to increased interest by policymakers in studying the need for financial safety nets.
The conventional financial system has well-designed financial safety nets in place, particularly those related to crisis prevention strategies, as part of a comprehensive regulatory and supervisory framework designed to ensure the soundness and stability of the system.
Cognisant of the need for such financial soundness and stability in the Islamic financial industry, the Islamic Financial Services Board (IFSB) has been highlighting in its various publications and initiatives since 2005 the need for Sharīʻah-compliant financial safety net facilities.
On 17 November 2011, the Islamic Financial Stability Forum (IFSF), a Council of the IFSB, held its fourth meeting with the theme, “Strengthening Financial Safety Nets: Sharīʻah-Compliant Lender of Last Resort (SLOLR) Facilities and Emergency Financing Mechanisms as well as Deposit Insurance”. The proceedings, among other initiatives, requested the Secretariat to conduct detailed cross-border studies on SLOLR facilities and a Sharīʻah-compliant deposit insurance scheme (SCDIS). Accordingly, an industry-wide survey on SLOLR and SCDIS was carried out as a stock-taking exercise among 38 banking regulatory and supervisory authorities (RSAs), including central banks, and monetary authorities who are members of the IFSB, between 19 June and 31 July 2012. The preliminary draft of the survey results was presented to a series of IFSB Technical Committee (TC) meetings to solicit feedback. The 31st IFSB meeting, held on 24 October 2013, agreed, among other things, to publish the draft as two separate working papers of the IFSB, one on SLOLR and the other on SCDIS. The papers were presented in a Sharī‘ah roundtable, organised jointly by the IFSB and ISRA, on 5 November 2015 in Kuala Lumpur. Sharī‘ah-related papers corresponding to the two topics – SLOLR and SCDIS – were also presented. The roundtable was themed “Financial Safety Nets: Striking a Balance between Sharī‘ah Requirements and the Soundness of the Islamic Financial System”. The event provided a forum for intellectual discourse between Sharī‘ah scholars and industry players on Sharī‘ah and practical issues related to these two topics. It was agreed that the papers presented at the roundtable and the ensuing discourse would be jointly published by IFSB and ISRA in 2016.The rest of this introduction summarises the issues described and recommendations proposed in the six papers included in this joint publication.
