Regulation of Islamic Banks

8/10/2019 Regulation of Islamic Banks

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Group members:

Muhammad Areeb Aijaz

Hussain Hakimuddin

Fawad Mehdi


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International perspectiveAAOIFI(Accounting and Auditing organization of

islamic financial institutions)

IFSB (Islamic financial service board):Its focal areasinclude Risk Management, Capital Adequacy,Corporate Governance & Supervisory Review

Process

IIRA (Islamic International Rating agency)


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Why regulate islamic banks? To protect the wealth of depositors

To ensure shariah compliance

Losses-ridden islamic banks may reduce publicconfidence in the financial system

To avoid any contagion


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Risks in Islamic banks

Solvency risk

Liquidity risk

Market risk Operational risk

No credit risk

Shariah-compliance risk


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Enhancing Risk Management Culture

in Islamic Banks

Development of internal rating systems and theutilisation of risk

management models, Market risk and value at risk (VaR) reports,

Liquidity risk reports,

Operational risk reports, and

Follow-up on internal control systems with a suitablechecklist.


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Areas of Challenge

Since investment depositors share in the risks of banks whiledemand depositors do not, one of the most important challengesof Islamic banking would be to adopt some strategy whereby therisks associated with investment depositors do not get mixed up

with, and transferred to, demand depositors.

If the international standards are adopted, the risk-weightingwill require the evolution of a methodology suitable fordetermining the relative risk of different modes of Islamicfinance.

The PLS modes are relatively more risky in nature. Therefore, theadoption of international standards may tend to create a naturalbias towards a greater utilisation of the less risky debt-creatingsalesbased modes of finance. This may tend to jeopardise themovement of the Islamic financial system to the desired optimal

mix of PLS and debt-creating modes.


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Capital Adequacy The nature of demands deposits is similar to that of

conventional banks, while the nature of investmentdeposits is significantly different. So investment

deposits were treated as off-balance sheet items. The AAOIFI capital adequacy ratio = Total capital/

total average risk-weighted assets financed by bankcapital and current accounts + 50% of total average

risk-weighted assets financed by investment deposits.This means that the risk of assets financed byinvestment deposits will be assigned a weight of 50%for the purpose of determining capital requirement


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Supervision of Islamic banks in

Pakistan

The SBP is pursuing a three-pronged strategy topromote Islamic Banking in Pakistan

establishing full-fledged Islamic banks in the privatesector;

setting up of subsidiaries by the existing commercial

banks; and allowing stand-alone branches for Islamic banking by

the existing commercial banks


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h) Utilizing SBP-SECP Joint Forum for the promotion of Islamic financial industry

i) Support industry players in development of Shariah-compliant liquidity managementinstruments

j) Utilizing the Shariah Advisor Forum for conflict resolution and for discussion onAAOIFI Shariah Standards for their adoption in Pakistan

k) Conduct awareness programme within and outside SBP to eliminate themisconceptions and to develop the confidence of the public about Islamic banking

l) Publication of Islamic Banking Bulletin (IBB) and Islamic Banking System review(IBSR) and facilitate different departments in preparing various SBP publications

m) Human resource capacity building in the Islamic banking industry throughcoordination with educational institutes


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Shariah compliance 1. Shariah Board at SBP

2. Shariah Advisor as per Fit & Proper Criteria

3. Essentials & Model Agreements of Islamic Modes ofFinancing

4. Shariah Compliance Inspection

5. Meetings of Shariah Advisors


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Islamic banking in Malaysia Separate Islamic legislation and banking regulations-

side by side with those of conventional bankingsystem.

Islamic banking Act of 1983 Empowered the government to issue Government

Investment Issue (GII).

Liquid assets; used to meet liquidity requirements as

well as for investment purpose. National Shariah Advisory council.


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Three Distinguishing Factors Large number of banks operating under Islamic mode

Window Islamic banking.

Broad Variety of instruments

Islamic Interbank Money Market (IIMM) Interbank trading of Islamic financial instruments

Mudarabah interbank investments (MII); getinvestments from a surplus islamic bank to one with low

finances. The government also uses Government investment

issues to raise funds, similar to sukuks

Documents

Regulation of Islamic Banks