An Introduction to Islamic Finance: Theory and Practice

(Romina) #1

322 AN INTRODUCTION TO ISLAMIC FINANCE


of potential problems. Although, standards for exposure, governance, and
supervision have been issued by the IFSB, these standards have yet to be
adopted formally by regulators and national authorities. National supervi-
sory authorities may be very familiar with the supervision framework and
methodology of conventional fi nancial institutions, but they need to pay
attention to revising supervisory standards and manuals for Islamic insti-
tutions in addition to getting serious about implementing IFSB standards.
Another dimension of complexity in supervision is introduced by the exis-
tence of Islamic windows from conventional banks and the need to maintain
a proper fi rewall to segregate Islamic assets from conventional assets.
As Basel III incorporates macroprudential measures to help address sys-
temic risk and the interconnectedness of fi nancial systems, regulators and
supervisors need to enhance supervision of Islamic institutions by forcing
these institutions to improve their internal risk systems, their compliance with
reporting requirements, the transparency of their disclosures, and the quality
of information they put out. Without focusing on these issues, the authorities
will not have a meaningful understanding of the risks such institutions pose
to the system.


ENDNOTES



  1. See Basel Committee On Banking Supervision (BCBS) (2003), Consultative
    Document-Overview of the New Basel Capital Accord, April, Bank for Inter-
    national Settlements, Basel, Switzerland.

  2. For detailed methodology of how to determine risk weights for different assets,
    consult IFSB standard on capital adequacy at http://www.ifsb.org.

  3. Under the Basic Indicator Approach, a fi xed percentage, namely 15 percent, of
    the annual average gross income, averaged over the previous three years, is set
    aside. Under the Standardized Approach, this percentage varies according to
    the line of business, from 12 percent for retail banking, asset management and
    retail brokerage to 15 percent for commercial banking and agency services, to
    18 percent for corporate fi nance, trading and sales, and payment and settlement.

  4. The wikala contract operates on the basis of the agent receiving a fi xed fee, not
    a share of profi ts as in the mudarabah.

  5. IMF (2009).

  6. Ibid.

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