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BankMuscat Meethaq Islamic Banking
SESSION 6: FINANCIAL STABILITY, STRUCTURES & CREDIT ENHANCEMENT IN ISLAMIC FINANCIAL MARKET PRODUCT
Prepared by: Mohamad Noranuar bin Sajari BankMuscat Meethaq
Presentation Outline
SECTION 1
Financial Stability: A Glimpse
a. At the time of writing, there is no ‘consensus & easy’ definition of FS from the literature view point.
b. But, FS will normally be associated with the following components: 1) Monetary stability 2) Employment levels close to the economy’s natural rate 3) Confidence in the operation of the generality of key financial
institutions and markets in the economy 4) Where there are no relative price movements of either real or
financial assets within the economy that will undermine (1) or (2)
Financial Stability: What it is?
Source: Michael Foot, Former MD of FSA UK (What is financial stability and how do we get it?)
Financial Stability: Understanding the Impact
REGULATORS
OBJECTIVES FOCUS AREA EXTRA POINTS FOR ISLAMIC FINANCE
Strengthened prudential oversight of capital, liquidity and risk management
- Over leveraged - ALM - BASEL requirements*
- Unique Shariah Compliance Risk Management
Enhancing transparency and valuation
- BCOBS on Pillar 1 (Min Capital Requirements), Pillar 2 (Supervisory Review Process) and Pillar 3 (Bank’s exposure to specific risks)
- Disclosure based on contract entered into / exit
- Accounting disclosures (PER to PSIA / IRR to PSIA / ROA & ROE)
Strengthening the regulators' responsiveness to risks
- Appropriate level of intervention - Monetary Policy vs Fiscal Policy
- Unique Islamic Finance guidelines
Robust arrangements for dealing with stress in the financial system
- E.g. Flexibility of Statutory Reserve Requirements
- Level playing field for Islamic Finance players
+
Financial Stability: Understanding the Impact FIs / IFIs
OBJECTIVES FOCUS AREA / ACTION POINTS
Clear accountability for each institution - To avoid ‘convoy effect’ (One failure causes knock-on losses to others and threatens the confidence that banks need if they are to retain their deposits)
- Lehman Brothers
No duplication of effort & The need to use the alternatives provided (support only is NOT enough!)
- Classic example of KLIRR and most recently IIBR
Regular exchange of information (as each institution is plugged into somewhat different information circuits)
- Roundtable discussion - Maintaining market confidence - Promoting public awareness - Protecting consumers - Reducing irresponsible financial / cheap credit
Financial Stability: Understanding the Impact
CONSUMERS (CORPORATES + RETAIL)
FOCUS AREA ACTION POINTS
Make savings automagical - Auto-sweep facility
Control the ‘impulse’ of spending - Net Gearing Ratio for corporates - Debt Burden Ratio for retail
Eliminate and avoid debt - ‘Debt Elimination Plan’ - Sukuk (a new ‘debt’ hole to close the other
debt hole)
Financial Health-Check - Evaluate Expenses vs Revenues, Savings vs Investment, Protection
Financial Stability: Case Studies
FINANCIAL CRISIS DISCUSSION POINTS
Eurozone Sovereign-Debt Crisis - Off-balance sheet spending - Borrow beyond means / Unable to repay - Trade imbalance - LOLR!!!
Sukuk Default - Asset-backed vs Asset-based - Shariah Review
SECTION 2
Shariah Compliant Credit Enhancement Mechanism
The process of reducing credit risk by requiring collateral, Takaful (or insurance if the coverage is not available in the Takaful space), financial instruments (such as margin maintenance / trade finance facilities) or other agreements to provide the financier with reassurance that it will be compensated if the financee defaulted.
Credit Enhancement: What it is?
Source: Investopedia
Credit Enhancement for Islamic Finance
To be Avoided Point of Attention
NO Collateral Required - Unsecured financing naturally lead to a higher NPF w/o any asset to be liquidated
- GBBB approach can to be established
NO Credit Report / Credit Scoring Ratio - Company net gearing ratio etc
NO Business Plan / Cash Flow - To balance between Losses / Break even / Making Profit
- Organic Growth
NO Asset or Real Estates Appraisals - Independent Valuation & Revaluation post disbursement
Sample Structure of Credit Enhancement
Margin Maintenance – Mudharabah Structure
Sample Structure of Credit Enhancement
Margin Maintenance – Wadi’ah Structure
Sample Structure of Credit Enhancement
Margin Maintenance – Qardh Structure
