"Our base-case scenario assumes that there will be no major changes in Islamic banks' quality of capital, which we see as strong on average," said Standard & Poor's credit analyst
"These buffers will ultimately help Islamic banks to cope better with the cyclical nature of the economies of the countries in which they operate and major business activities. Most of the Islamic financial institutions that we rate operate in emerging economies and also tend to have fairly significant exposure to the real estate sector.
"While we continue to view the liquidity of the Islamic financial institutions that we rate as adequate on average, we think that Basel III implementation creates an opportunity for the industry to develop a new range of HQLA to address the chronic lack of such instruments."
Over the past few years, the
The implementation of Basel III will also test the treatment of profit sharing investment accounts (PSIAs) from liquidity and funding perspective. PSIA holders are, in theory, obliged to share any losses, but this could increase their volatility and liquidity coverage requirements and reduce their role as stable funding sources.
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