Basel II and Regulatory Framework for Islamic Banks by M. Ka
From HodHood
Contents
Top 20 FREQUENT WORDS
islamic 251 banks 228 accounts 61 risk 55 banking 53 conventional 50 financial 48 risks 47 investment 44 holders 39 regulation 39 deposit 33 regulatory 31 account 29 credit 27 liquidity 24 basel 23 terms 23 products 21 rating 21
DOCUMENT KEY POINTS
- llewellyn lists these as the mix of contracts on the liabilities side of the balance sheet the quasi equity nature of investment deposits implying that some depositors share in the risk of the bank a wider variety of modes of financing and asset mix of banks and the risk sharing characteristics of the contracts issued and who bears risk
- although any participation of islamic bank is secured with the assets of the partnership any liability thereof is also participated by the islamic bank
- in the early stages of the islamic banking equity participation was the primary credit utilization methodology whereas today such participations constitute a very low percentage of the assets about
- the problem is that the amount of loss may exceed the amount of equity within the islamic bank and may force to dip in to deposits
- accounting and auditing organization for islamic financial institutions aaoifi suggests a formula for the capital adequacy ratio car oc woc l wpls where car is the capital adequacy ratio woe l is the average risk weight of assets financed with the islamic bank s own capital and liabilities other than investment accounts wpls is the average risk weight of investment accounts
- the same situation applies to stock exchanges where stockholders become partners in companies through stock purchases that they make with the intermediation of stock exchanges
- since islamic banks are susceptible to business specific risks and risks arising from direct equity participations supervision and regulation may have to be extended to partnered companies
- one company who is in the market for credit may want to shop for terms and conditions which mean many islamic banks have to allocate precious time and resources for a project that may not be worthwhile
- although credits utilized through equity participations may seem uncollateralized the stake at the assets of the partnership and their valuation should be an integral part of the rating system
- the same risk applies to investment deposits but since they participate to risk directly their concern is centered on the capital level of the islamic bank and on the regulation of islamic bank in terms of misconduct and excessive risk
- llewellyn lists the economic rationale for regulation and supervision in banking and financial services potential systemic problems correction of market failures need for monitoring financial firms the need for consumer confidence potential grid lock with associated adverse selection moral hazard associated with safety net arrangements and obtaining a degree of preference for assurance and lower transaction costs
- some opine that islamic banks should not be subject to all regulatory measures specified by basel ii but they should be subject to regulations similar to corporations due to the participation of the investments depositors in the risk of islamic banks hassan and chowdhury
- some of the reasons for suggesting regulation to be viewed in a wider concept as a regulatory regime are regulation may be inflexible and monopolistic alternative routes to regulation may be cheaper prescriptive regulation is not effective to reduce bank failures regulation may impair other mechanisms for financial stability
- the deposit holders will always want the shortest maturity for the highest return and credit utilizing customers will always want to have the longest maturity for the lowest cost possible
- for instance if there are no pls accounts above and beyond six months islamic banks should issue credits with similar ter miss pls account holders deposit their money to islamic banks to invest their money in investment opportunities that have maturities equal to the account maturity
- such methodology may provide steady returns but it brings regulatory proble miss if shareholders have consent to sacrifice their share to provide better returns to deposit holders it is for the sake of enhancing islamic banking
- banks are allowed to keep their liquidity in terms of cash and or cash like ite miss the notion of marketable security is very common for conventional banks as a liquidity precaution
- muljawan et al suggests that the amount of pls accounts should not exceed the combined amount of equity capital and the mark up amount of trade related credit instruments
- previous liquidity crises should set an example for the actual depth of such securities market
- the actual liquidity of marketable securities should be of great concern
- issues in transparency in islamic banking regulation and supervision of islamic banks current status and prospective developments seminar irti the high institute for banking and financial studies april khartoum
- hall a capital adequacy framework for islamic banks the need to reconcile depositors risk aversion with managers risk taking applied financial economics vol
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DOCUMENT WORD ANALYSIS
Main Category
- AlHuda Material\islamic banking
KeyWords
islamic banks banking financial finance investment conventional institutions funds risk financing deposits assets services management international countries equity profit products
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DOCUMENT REFERENCES
Number of Pages
16
Published Date
2008-06-30 13:49:22
