Post by Trade Coach on Apr 10, 2017 17:55:45 GMT 1
IMF PROPOSALS CALL FOR BETTER PRUDENTIAL GUILDLINES FOR ISLAMIC BANKING
Islamic banking has been one of the fastest growing financial services sectors in the world. The industry grew to more than 1.5 trillion dollar in assets last year from about 100 billion dollar in the late 1990s. Islamic banking now has a presence in 60 countries of the world, mostly in the Middle East and Southeast Asia, but increasingly in Africa, Central Asia, and Europe, according to the International Monetary Fund.
The rapid growth of Islamic banking has created enormous challenges for regulators, particularly in countries where it has become systematically important (meaning that its assets account for more than 15 percent of the total). These countries – which are about 14 in number, include Malaysia, Kuwait and Saudi Arabia. These regulatory challenges have led to increased demand for international prudential standards for handling the opportunities as well as the financial stability and regulatory implications of Islamic banking. In response to these, the IMF recently adopted a set of proposals designed to help the Fund play a pivotal role in ensuring financial stability in countries with Islamic banking as well as support the development of the country.
The IMF proposals are complementary with regulatory frameworks developed by the Kuala Lumpur-based Islamic Financial Services (IFSB), which has a mandate to develop prudential standards for Islamic financial services. The IFSB has established several industry standards, including for capital inadequacy, governance, risk management, and the supervisory process in line with the standards issued by authorities such as the Basel Committee on Banking Supervision (BCBS).
On capital requirements, the IMF is proposing that more robust models should be developed for calculating the capital adequacy ratios of Islamic financial institutions.
With regards to licensing requirements for Islamic banks, the IMF called for modifications that would take into account features peculiar to the industry. These modification include business plans that detail strategies for attaining and maintaining profitability amongst other things; capital requirements that specify minimum levels as well as composition and quality of initial capital; fit and proper requirements that ensures the suitability of significant shareholders, board members, managers, and staff; corporate governance structure that promote transparency and support effective supervision; and initial control mechanisms that provide adequate risk management and reporting processes.
Given that Islamic banks often rely on the acquisition of and direct investment in commodities and real assets, the IMF urged supervisors to assess the impact of these investment activities on the risk profile of banks and require additional capital requirements in cases where banks are excessively exposed to investment that are not properly managed.
Notwithstanding the growth of Islamic banking, the IMF raised concerns about the lack of consistent application of IFSB standards, particularly in countries with systematically important Islamic banks. According to the IMF, only about 60 percent of countries in a 2016 survey had modified their legal and regulatory frameworks to accommodate Islamic banks.
In Nigeria, the Central Bank of Nigeria in 2011 released guidelines for Islamic banking in the country. This has led to the expansion of Islamic financial services in its main normative forms: (1) as stand-alone banks and (2) as subsidiaries or windows of conventional banks. Jaiz Bank, the largest Islamic banking franchise in Nigeria, operates as a stand-alone bank with more than 50 billion naira in assets and 20 billion naira in customer deposits. On the other hand, Stanbic IBTC and Sterling Banks have been licensed to operate Islamic banking windows alongside their conventional banking operations.
Given Nigeria’s huge unbanked population and 70 million-strong Muslim population, Islamic banking Services is expected to command a significant portion of the country’s financial system in the near future. In view of this, policy makers and operators should take note of IMF’s and IFSB’s prudential guidelines for ensuring financial stability while exploring the vast opportunities for Islamic finance.