Islamic finance body to revise its capital rules to fit Basel III

Islamic finance body to revise its capital rules to fit Basel III

basel iii

he Islamic Financial Services Board, an association of regulators in Muslim countries, will revise its rules next year to enhance Shariah banks’ capital in line with Basel III reforms, its secretary-general said.

Rifaat Ahmed Abdel Karim said IFSB would seek its council’s approval in December to begin work next year on amending the regulations, with the process expected to be completed around 2013.

“We are revising the standard of capital adequacy to look into the need for more capital and in what form will that additional capital be,” Abdel Karim said in an interview, adding that this could take the form of contingent capital.

He said the aim of the changes was “not to put the Islamic financial services industry at a disadvantage and to provide them with a level playing field” relative to conventional banks but did not elaborate on possible revisions.

Global regulators of convention banks, seeking to prevent a repeat of the global credit crisis, agreed recently to force banks to more than triple the amount of top-quality capital they hold in reserve, though they were given time to raise funds.

Islamic banks are governed by the respective regulatory authorities in the countries where they operate and compliance with IFSB’s guidelines is voluntary.

The Kuala Lumpur-based IFSB, whose members include central banks, the International Monetary Fund and lenders such as Kuwait Finance House and Sharjah Islamic Bank, is one of two standards-setting bodies and issues guidelines on the banking, capital markets and insurance sectors.

The other is the Accounting and Auditing Organisation for Islamic Financial Institutions in Bahrain, which traditionally issued guidelines on accounting standards but has more recently ruled on Islamic bond structures.

Abdel Karim said the IFSB’s liquidity management Corp, which will issue short-term instruments to help Islamic lenders manage their cash, would give banks an alternative to the widely used commodity murabaha money market instrument.

“This will hopefully give depth to the capital market,” he said. “Liquidity management hasn’t been addressed in a more concerted way. This is the first time we see a number of regulatory authorities cooperating to address the issue.”

A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, with Shariah banks handicapped partly due to the limited range of products they can invest in.

The liquidity body may issue highly rated sukuk that would be backed by central bank and corporate assets as early as next year to help Islamic banks manage their liquidity and create a liquid cross-border market for Islamic instruments.

It would have $1bn in authorised capital and has $75mn in paid-up capital so far.

Islamic banks are now often forced to place the reserve liquidity they need to maintain under central bank requirements with international conventional banks through commodity murabaha, as there are not enough highly rated sukuk issues.

But some Islamic scholars say commodity murabaha is a mere paper trail replicating conventional money market instruments and only grudgingly accept its use as there is no alternative.


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