Category Archives: Shariah standards and regulation

Basel III in support of the Islamic banking principal

Basel III in support of the Islamic banking principal

By Dr. Aly Khorshid

basel iii

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative, and securitization activities to be introduced at the end of 2011.

Islamic banks are among the best capitalized banks in the world, and historically comply with inflexible standards of capitalization, Islamic Bank for capital requirements means that local banks already exceed norms set by the Bank for International Settlements (BIS) as part of the Basel III accord.

Islamic banks already have stricter capital requirements than what are proposed in Basel III. With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III.

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments. This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial.
The transition arrangements will enable banks to meet the new standards while supporting the economic recovery. The Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

Islamic Banks comply with Basel III
Islamic banks are among the best capitalized in the world, and historically stringent standards set , Islamic Bank for capital requirements means that local banks already surpass norms set by the Bank for International Settlements (BIS) as part of the Basel III accord, which has a 2019 deadline.

Islamic Bank already has stricter capital requirements than what is proposed in Basel III.

With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III (of 6 per cent and 8 per cent, respectively)."

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments.

This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

It appears that while actual implementation won’t start until 2013, the accords will not be fully implemented until 2018.

At this point we believe it is too early to assess the full consequences of these new regulation changes especially that Islamic banks have been complying with Basel II.

"However, until further analysis is made, we believe local banks could elect to conserve capital through constrained dividend payout," they said.

Source: http://www.english.globalarabnetwork.com/201012228432/Finance/basel-iii-in-support-of-the-islamic-banking-principal.html

Standardisation of Islamic finance industry: Expert calls for setting up watchdog

Standardisation of Islamic finance industry: Expert calls for setting up watchdog

regulation

Standardisation of the Islamic banking policies, procedures and regulatory framework on a global level is important to propel the growth of the industry.

That is the view of BBK investment banking arm Capinnova Investment Bank chief executive officer Jamal Hijres.

"An important effort towards achieving international consistency was the creation of two multilateral institutions, the Accounting and Auditing Organisation for Islamic Financial Institutions and the Islamic Financial Services Board.

"The growth of such institutions will definitely improve and propel the industry at a faster pace.

"The Islamic banking industry is a fast growing sector that offers an array of opportunities yet to be exploited," he said.

"Although the Middle East still represents the biggest share of the total Islamic banking sector, Western countries are gearing towards this new trend that presents a unique opportunity to diversify.

"With a growing market share and a considerable growth rate recorded over the past decade, it is essential for a unified global Islamic banking authority to be established.

"This authority can be entrusted with standardising Islamic banking operations and facilitating communication between the different entities, leading to the full exploitation of the sector’s potential.

"One of the most important challenges faced by the Islamic banking sector is the unavailability of experts in both banking and Islamic issues.

"An Islamic banker must possess a profound knowledge of Sharia rules and principles, in addition to finance.

"The shortage in experienced and qualified scholars is forcing them to field positions on multiple Sharia boards, which in turn increases the risk of a conflict of interest."

"Even though the financial crisis did not affect the Islamic banking industry in particular, the drop in Gulf real estate and oil prices had repercussions on the industry," he said.

"However, now with oil prices back in the normal range it has definitely brought confidence back to the industry.

"While Islamic finance is one of the big success stories in finance today, it is worth looking at the current credit crunch in conventional finance to see how easily one problem can spiral out of control.

"This is something that Islamic finance practitioners need to take on board and make sure they are prepared to expect the unexpected.

"Rigid corporate governance programmes, transparency on compliance, learning from conventional banking successes and failures and achieving greater market penetration are all goals that will help sustain this area of Islamic finance."

Source: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=294232

New regulations require Shariah Advisors in Pakistan to attend board meetings

New regulations require Shariah Advisors in Pakistan to attend board meetings

The State Bank of Pakistan (SBP) published new regulations that require Shariah Advisors to attend the meeting of the Board of Directors of their bank in which the Shariah Advisor’s report on the bank’s annual financial statements is discussed.

A press release by SBP states:

“In order to provide the opportunity to the Shariah Advisor to present the report so prepared to the Board of Directors (BoD) and apprise the BoD about his assessment on the overall Shariah compliance levels and environment in the Institution, the IBIs are advised to invite their respective Shariah Advisor for discussion on the Shariah Compliance Report in the BOD meetings in which annual audited accounts and Shariah Advisor’s report are discussed and approved.”

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.

Source: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=401843&version=1&template_id=48&parent_id=28

Annual AAOIFI conference in December 2010

Annual AAOIFI conference in December 2010

aaoifi

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has announced that it would hold its annual conference on Islamic banking and finance next month.

The event, from December 1 to 2, will be held at the Crowne Plaza.

It is being organised in co-operation with the World Bank and participation of the National Commercial Bank under the auspices of the Central Bank of Bahrain.

It further emphasises Bahrain’s world leadership in the Islamic finance industry on the final day of the WIBC.

"AAOIFI is proud to organise such a high-level annual conference which addresses important topics and issues related to accounting and Sharia audit," said secretary general Dr Mohamad Nedal Alchaar.

"The conference is a key source of knowledge and information for businessmen, financiers and Sharia scholars.

"This year, we will discuss a number of topics, including corporate governance requirements for Sharia supervisory boards, conflicts between fatwas issued by different boards, addressing insolvencies in Islamic financial institutions, challenges in the capital markets, non-compatibility of certain international standards with Islamic financial transactions as well as applying Wa’ad "promise" and Irboon "earnest money" in Islamic financial transactions.

"These topics will be addressed by distinguished professionals," he added.

The conference will be followed from December 3 to 6 by intensive training courses under the Certified Sharia Adviser and Auditor programme, which includes Sharia compliance and review of processes in Islamic financial institutions, Sharia standards issued by AAOIFI on Islamic financial instruments and practices.

The main sponsors of the conference are Bahrain Islamic Bank, Al Baraka Banking Group, Jordan Islamic bank, Kuwait Finance House, Ithmar Bank, Gulf Commercial Bank, Path Solutions and ITS.

The AAOIFI is a Bahrain-based international autonomous not-for-profit organisation whose role is to develop accounting, auditing, ethics, governance and Sharia standards for Islamic financial institutions.

Source: http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=292466