316 AN INTRODUCTION TO ISLAMIC FINANCE
Segment C is designed for investors who are willing to take additional
risk and are prepared to participate in riskier investments, like private equity
or venture capital. IFIs could deploy these funds on the basis of musharakah
or mudarabah instruments. With the former, the IFI also gets rights to par-
ticipate in the governance of the enterprise, which raises another issue for
the regulators. The IFI’s relationship with musharakah enterprises would be
of a long - term nature, with active involvement in governance, as opposed to
a short - term, transactional relationship.
To summarize, an IFI structured to provide fi nancial intermediation
through clearly segmented windows, or even separate institutions, would
make the task of the regulators easier. Each entity could then be subject
to a regulating principle most suited to its nature. Such a separation could
promote greater transparency of the risks faced by depositors, sharehold-
ers and regulators. The outlined framework would also bring to bear the
market discipline through the risk sharing feature of Islamic fi nancial inter-
mediation, and contribute to the stability of the system. An Islamic fi nancial
industry incorporating such segmentation would likely require lighter and
more focused regulation.
POST - CRISIS REGULATORY ENVIRONMENT
AND IMPACT ON IFIS
There is no doubt that the lessons learnt from the crisis will shape the changes
in the regulatory and supervisory framework and practices. The debate on
which direction policymakers need to take has already heated up in several
international fora, including the Financial Stability Forum (FSF), the IMF,
national authorities, and standard - setting bodies who are collaborating to
address the defi ciencies and enhancements. Working groups at the FSF and
G - 20 are reviewing a wide spectrum of related issues, including complex and
diffi cult legal and institutional hurdles to improving cross - border coopera-
tion in regulation and the resolution of troubled institutions.^5
Figure 14.1 is a very good depiction of how fi nancial institutions are
being surrounded by different pressure points which came to the surface
during the crisis. This gives us an idea of the nature of the issues under con-
sideration for shaping a new fi nancial landscape. The environment within
which today’s fi nancial institutions are operating is changing and the key
drivers for the change include defi ning capital and its adequacy, liquidity,
securitization, rating agencies, compensation, OTC derivatives, and system-
ically important entities. In this section, we will discuss select key drivers
and how each will affect the Islamic fi nancial services industry.
Capital Requirements
The fi rst realization is that the increased complexity in the fi nancial sys-
tem and growing innovation among fi nancial institutions, without a clear