Islamic finance body IFSB launches industry indicators

The Islamic Financial Services Board (IFSB) has launched a databank of industry indicators covering 15 member countries, helping shed new light on the size and shape of the sharia-compliant banking sector.

The Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, is supporting a range of initiatives to improve supervision of the sector as it achieves greater prominence in several Muslim-majority countries.

The 188-member IFSB added financial inclusion to the industry's agenda this month and released final guidance on liquidity management for Islamic banks.

The IFSB collected data directly from regulatory bodies and plans to update figures on a quarterly basis, while adding more countries and sectors, it said in a statement.

For the initial 15 countries, a total of 207 Islamic banking institutions were identified, which held a combined $1.18 trillion in assets and had 10,711 branches as of 2013.

Country-specific data also provides a rare insight into Islamic banking practices in Saudi Arabia and Afghanistan, where official figures are hard to come by.

At the end of 2013, Saudi Arabia had 4 full-fledged Islamic banks and 8 Islamic windows, units of conventional banks that offer sharia-compliant financial services.

Islamic lenders in the kingdom rely heavily on murabaha, a cost-plus mode of financing, which represents 62.4 percent of total financing for full-fledged Islamic banks and 86.7 percent for Islamic windows.

In contrast, Afghanistan had 6 Islamic windows and no full-fledged Islamic banks, relying on a profit-sharing contract known as musharaka for 53.3 percent of total financing.

The data also covers Bahrain, Bangladesh, Brunei, Egypt, Indonesia, Jordan, Kuwait, Malaysia, Nigeria, Oman, Pakistan, Sudan, and Turkey.

The IFSB indicators are being developed with technical assistance from the Asian Development Bank and the Islamic Development Bank. 

(Reuters / 27 April 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

IFSB guidance for Islamic banks may spur sukuk issues, deposit insurance

The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released final guidance on liquidity risk management for Islamic banks, which may spur national authorities to issue more sukuk and establish sharia-compliant deposit insurance schemes.

The guidance note, known as GN-6, clarifies the tools that Islamic banks can use to meet Basel III regulatory requirements, now being phased in for both conventional and sharia-compliant banks around the world.

It defines the types of high-quality liquid assets (HQLA) that Islamic banks can hold and the weights that should be assigned to Islamic deposits, which can be more volatile than conventional ones for various reasons, including the fact that they have relatively short maturities.

HQLA must have low correlation with risky assets, an active secondary market and low volatility. The highest level of HQLA includes sukuk (Islamic bonds) issued by sovereigns, multilateral development banks and the Malaysia-based Islamic Liquidity Management Corp.

Such HQLA should be accepted by central banks as collateral in their liquidity facilities, the guidance note says. The note could therefore encourage issuance of HQLA and local currency sukuk by sovereigns and their central banks, credit rating agency Standard & Poor's said in a research note.

"Based on the size of the Islamic finance industry, its composition, and its growth trajectory, we estimate the need for HQLA to reach about $100 billion in the next few years," S&P added.

The guidance note also details three arrangements that regulators can use to meet Basel III requirements in more undeveloped banking markets: central bank liquidity facilities, foreign currency HQLA that could be used to cover domestic currency liquidity needs, and expanded use of lower-level HQLA.

DEPOSIT INSURANCE

In the long term, the guidance note will also encourage regulators to develop Islamic deposit insurance schemes to reduce the need for HQLA, S&P said.

The note says such schemes could significantly lower the run-off rates, or weights, that are assigned to deposits. The riskier the funding source, the larger the amount of HQLAs needed to cover deposits.

For deposits classified as "stable", the IFSB guidance applies a 5 percent run-off factor, but this can be cut to 3 percent if a deposit insurance scheme is in place that is based on a prefunding system and is available quickly.

For less stable deposits, a minimum run-off rate of 10 percent is to be applied, the guidance note says.

The IFSB note classifies foreign currency-denominated retail accounts, which are large at some Islamic lenders, in the less stable category.

(Reuters / 20 April 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

IFSB eyes stronger implementation of Islamic finance standards

The Islamic Financial Services Board (IFSB) will release an updated 10-year industry roadmap next week as it places greater emphasis on the implementation of its standards with regulators around the globe.

Guidelines from Kuala Lumpur-based IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in some Muslim-majority countries and makes inroads in western markets.

The IFSB will release a Mid-Term Review (MTR) of the industry’s 10-year framework document on May 19, outlining benchmarks to monitor industry progress in a more focused way, IFSB secretary-general Jaseem Ahmed told Reuters.

The original framework, released in 2007 by the IFSB and the research arm of the Jeddah-based Islamic Development Bank , identified 16 recommendations for policymakers but did not spell out detailed metrics to track their progress.

“The MTR proposes a stronger implementation plan. This plan includes concrete initiatives – to be undertaken by a range of stakeholders – to bring the recommendations to life.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide, a decision driven in part by their diverse legal and regulatory backgrounds.

Now, however, the 184-member IFSB hopes to draw up more concrete steps for regulators while still leaving some flexibility given the wide range of industry development.

“A roadmap can be very helpful to national authorities, and the national industry, but in practice quite a few years of experience is needed before it becomes practical to develop an effective roadmap.”

INTEGRATION

Over the last decade, the IFSB has issued 22 standards and guidelines and now plans to develop new standards for Islamic reinsurance (retakaful) and capital markets, said Ahmed ahead of the IFSB’s annual summit to be held in Mauritius next week.

“The greatest need is to bring takaful and capital markets to a state of comparability, from the regulatory perspective, with the banking sector. So these are two areas where we are gearing up for additional issues.”

A working group to study a standard for retakaful has now been launched and another working group will soon be set up to study a standard for capital markets, Ahmed said.

“This is an important initiative to facilitate the integration of Islamic finance into the global economy by bringing it within the global surveillance mechanism of the International Monetary Fund and the World Bank.”

In the past two years, the IFSB has issued separate guidelines on liquidity risk management, stress testing and capital adequacy, with further guidance in the pipeline.

The IFSB has now begun work on a technical note on stress testing and it has also conducted a study on liquidity issues to help shape a guidance note.

The latter would take up the challenges posed to Islamic banks by the liquidity coverage ratio and net stable funding ratio introduced by the Basel III framework, said Ahmed.

MARKETS

Islamic finance has its core markets in the Middle East and Southeast Asia, but its expansion into new jurisdictions has meant the IFSB is increasingly in touch with regulators in Africa, Asia and Europe.

“Implementation is picking up as the market grows. We see a clear pick up in implementation once the market becomes larger than 5 percent of the total of the respective financial sector.”

Countries like Senegal, Gambia, Nigeria and South Africa have taken steps to develop the industry, while detailed regulatory frameworks have emerged in others, said Ahmed.

“Oman and Kazakhstan are two examples of new markets in which policy-makers have benefited from the experiences of earlier jurisdictions.”

Over the past year, the IFSB has engaged with regulators in Nigeria, Sudan, Hong Kong, Bangladesh, Afghanistan and Libya; It held regional sessions at the Asian Development Bank and in Oman for the Gulf region. Its last European forum was hosted by Italy’s central bank.

“We are now preparing capacity and awareness building to be undertaken in Central Asia and in West Africa,” Ahmed said.

In March, South Korea’s central bank became a member of the IFSB, joining the likes of the central banks of Luxembourg and Japan and the monetary authorities of Hong Kong and Singapore.

(Business Day / 13 May 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

IFSB revising guidelines for Islamic finance institutions around the world

SYDNEY: Kuala Lumpur-based Islamic Financial Services Board (IFSB) is revising guidelines on the supervision of Islamic finance institutions around the world, helping tighten regulatory oversight of industry practices.

Guidelines from the IFSB, one of the main standard-setting bodies for Islamic finance, are gaining prominence as the industry takes a greater share of the banking sector in several majority Muslim countries.

The latest update complemented stricter Basel rules, agreed globally to make banks safer after the 2007–09 credit crisis, IFSB secretary-general Jaseem Ahmed toldReuters.

This expands its original 2007 document, known as IFSB5, to include areas such as regulatory capital, corporate governance, stress testing, securitisation exposures, liquidity, concentration and counter-party risk.

“Overall, the revisions are significant, in particular the areas which were not envisaged in the IFSB5,” Ahmed said. “It is broadly analogous to Pillar 2 of the Basel accords.”

Founded in 2002, the IFSB’s initial efforts have focused on winning a wide membership base, leaving implementation and enforcement to national regulators to decide.

Now, however, the 187-member IFSB is issuing more detailed guidance in response to the global financial crisis, and a trend towards tightening regulation of conventional financial markets.

In the past year, the IFSB has issued separate guidelines on liquidity risk management and stress testing, while currently reviewing a draft on capital adequacy.

The revision provides more detailed guidance on areas such as Islamic windows, a practice which allows conventional banks to offer Islamic financial services provided that clients’ money is segregated from the rest of the bank.

Islamic windows are widely used in the industry but some regulators have struggled to cope with monitoring their risks and the complexity of financial reporting.

The IFSB plans a public hearing on the revised standard on Monday in Qatar, following a similar hearing in Kuala Lumpur last month.

(The Star Online / 07 Dec 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com