The revised capital requirements for
The banking and financial analysts, however, say the regulators should join hands to develop more Islamically acceptable liquid instruments for enhanced asset allocation and liquid management.
"The revision of capital requirements for Basel III should encourage the Islamic banks to allocate more funds towards quality assets, which will diversify the risk and strengthen their balance sheets,"
According to an estimate, global Islamic banking assets are ranging from
Ali said introduction of LCR by the Islamic Financial Services Board (IFSB) is expected to address the issues such as the lack of high quality assets provided the regulators come up with a relatively comprehensive list of high quality liquid asset (HQLA) keeping in mind the Islamic banks' Shariah-imposed investment restrictions.
"Restricting to purely government sukuks or other instruments which do not have sufficient market depth may cause an adverse impact, Ali said.
Ashruff Jamall, partner — Global Islamic Finance Leader of
"Regulatory and supervisory authorities may need to use national discretion in order to account for specific economic conditions and the business models of Islamic financial institutions in their respective jurisdictions," Jamall told Khaleej Times.
"Regulators in the
To a question about IFSB revised capital requirements for Basel III standard, he said those elements of the Basel III framework, which are relevant to the Islamic financial services industry, would certainly have a positive impact in strengthening the capital and liquidity of Islamic financial institutions.
"The requirements relating to enhanced risk management, governance, liquidity, such as LCR and NSFR, maintenance of higher capital buffers such as the counter cyclical buffers and tighter rules around composition of capital will all contribute to boosting the capital requirements of Islamic financial institutions.
"Islamic financial institutions that foresee the need for an increase in their capital should start taking proactive steps to comply with the applicable elements of Basel III, which is being phased in over a number of years through to 2019," Jamall said.
The IFSB is likely to release its guidance note on the parameters and calculation of the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) in early 2015.
Credit rating agency Standard & Poor's, which believes that the IFSB revised capital requirements for Basel III could help to strengthen the Islamic finance industry, said in a recent report that the introduction of a LCR might address some of the industry's long-standing weaknesses, particularly the lack of HQLA.
"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. At the same time, we believe that raising capital requirements through the introduction of new capital buffers will help to make the industry more resilient," 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
Other central banks, the International Islamic Liquidity Management Corporates (IILM), and the
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