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Tuesday, 27 June 2017

Continued Islamic banking surveillance vital

WHEN the International Monetary Fund (IMF) publishes a market, sector or country report, governments, regulators and market players take note. Such reports are treated as a barometer of the state of a country or industry at any given time and may impact on the international ratings of a sovereign, market or institution and, therefore, the cost of finance or the chances of a country getting a standby facility from the fund.
These publications can be as banal as they are subjective, often based on selective assumptions and on dated data, even though several member countries excel at releasing timely statistics to the last quarter in the financial year.
A few days ago, IMF published its latest offering — multi-country case studies on “Ensuring financial stability in countries with Islamic banking”, which supplements a report published in March this year giving country experiences with reforms to strengthen regulatory oversight of the global Islamic banking sector. This latest report “reviews experiences with and the progress made in adapting prudential, safety nets and resolution frameworks to Islamic banking”.
The case studies comprise several countries from a range of regions, with different levels of development and approaches to Islamic banking. These, according to the IMF, were “designed to provide a representative sample of country experiences so as to enrich the policy conclusions. Such a multiplicity of experiences can help to identify common challenges that countries face in reforming their regulatory frameworks and to distil best practices”.
How the IMF and the authors of the report can justify the above sentiments is beyond comprehension, for the countries featured exclude the single largest and most important Islamic finance market in the world in terms of assets under management, Saudi Arabia, and the country which is home to the first Islamic commercial bank, Dubai Islamic Bank. , in 1975, the UAE, which also entertains the ambition of developing Dubai as the Global Islamic Economy and Finance Hub. The featured countries are Bahrain, Djibouti, Indonesia, Kenya, Kuwait, Malaysia, Nigeria, Pakistan, Sudan, Turkey and the United Kingdom. Is this report a mere re-working of the earlier one, or was this an oversight from IMF the fund staff for political or bureaucratic reasons?. Indeed, an IMF Consultation IV team visited Saudi Arabia in March.
Malaysia, due to through proactive policies adopted by successive governments, from Tun Dr Mahathir Mohammed Mohamad to Tun Abdullah Ahmad Badawi and Datuk Seri Mohd Najib Abdul Razak, has has led the global industry in developing a world-class Islamic finance architecture complete with regulatory, legal, reporting, product innovation, syariah Shariah governance, consumer protection and education frameworks. The IMF report acknowledges that Malaysia has one of the most developed Islamic finance industries in the world, which has seen rapid growth, particularly in the aftermath of the global financial crisis, with prospects for further growth high.
“Malaysia’s experience,” stresses the IMF, “underscores the critical role of an enabling regulatory environment in promoting growth and stability of the Islamic banking industry. The institutional and regulatory framework covers a range of areas, including regulatory, legal, Shariah syariah governance, consumer protection and safety nets. Financial instruments and interbank investment allow surplus banks to channel funds to deficit banks, thus maintaining the funding and liquidity mechanism necessary to promote stability in the system.”.
The fund, however, urges Malaysia “to progressively adapt its regulatory framework in line with emerging risks and needs of the industry,”, and warns that the “absence of long term funding on the liability side could increase maturity mismatches and increase liquidity risks for banks.”. Therefore, continued enhanced financial sector surveillance will be key to safeguarding financial stability, and further adaptation of stress testing techniques to Islamic banking will be important for early identification of risks. The IMF also urges the resolution regime (insolvency, liquidation, etc.) for Islamic banks should be continually reviewed to ensure that it fully complies with international best practices.
These are stating the obvious, given the fund’s observation that Malaysia’s Islamic banking sector is supported by highly developed financial markets and infrastructure that enable the banks to manage various risks, and includes a well-developed Sukuk and interbank market and safety nets such as a Lender of Last Resort (LoLR) and deposit insurance, as per the provisions of the Islamic Financial Services Act 2013 and the Malaysia Deposit Insurance Corporation Act 2005.
Among the key takeaways of the report is the need for greater consistency in the application of capital adequacy requirements in relation to profit-sharing investment accounts, among others. Bahrain, Sudan and Malaysia have adopted relevant standards of the Islamic Financial Services Board, while others still apply the regime for conventional banks.
Also, a robust syariah Shariah governance framework and internal risk controls are imperative as well as fit and proper requirements for syariah Shariah board members should include an appropriate level of knowledge of Islamic finance.
The report also highlighted the need to develop Islamic capital and interbank markets, and to adapt central bank monetary operations, including the LoLR framework. Regular sovereign issuance of Sukuk with different maturities to provide a benchmark pricing curve and to increase the provision of High Quality Liquid Assets (HQLAs) is vital.
A key requirement that which the IMF recognises and endorses, and which several countries where Islamic banking is prevalent do not, is a centralised syariah Shariah board at the central bank, pioneered by the as Syariah Shariah Advisory Councils by Bank Negara Malaysia and Securities Commission, to help standardise industry practices, give syariah Shariah certainty and improve consumer perceptions. However, consumer protection, save in Malaysia, in many countries, save in Malaysia, are not anchored in laws or regulations and do not have cost-effective enforcement.
In a nutshell, Islamic finance, according to the IMF, while it has made impressive progress over the last four decades, is very much “a work in progress” that which should be under constant surveillance.
(Mushtak Parker - New StraitTimes, Malaysia - 27 June 2017)
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