Islamic banking — some regulatory insights

Islamic banking — some regulatory insights-The Royal Decree issued by His Majesty Sultan Qaboos authorising use of Shari’a adjustable agency of accounts has provided a altered befalling to the cyberbanking casework area and bodies of Oman at large. Islamic Accounts is accomplished in abounding jurisdictions and a afterpiece attending at country adventures reveals that countries with a able-bodied Islamic ecosystem (an adapted framework to accommodate a akin arena acreage to Islamic accounts from a legal, regulatory, prudential supervision, accounting and tax perspective) accept been added accustomed in this space. While Oman is fresh to Islamic finance, it can account from adventures of added jurisdictions.
Different countries use altered methods and approaches to analyze monitor, quantify and abate cyberbanking risks. These approaches, however, accept one important affair in common; i.e. a accident based, academic and analytical supervision.
Although there are abounding risks which are accepted to Islamic and accepted banks, the embodied appearance of accident and profit-and-loss administration in Islamic cyberbanking actualize a altered set of risks associated alone with Islamic banks. This necessitates a authoritative framework that is able to acknowledge to such risks.
A applied example
In 2004 back Islamic Coffer of Britain was actuality established, one of the basic issues that arose was apropos to the analogue of “deposit”. In UK, a drop is authentic as a “sum of money paid on agreement beneath which it will be repaid either on appeal or in accident agreed by parties”. The basic aegis anchored in the accustomed analogue and ensured through assorted authoritative ecology accoutrement including drop allowance scheme, is in absolute adverse with “Mudaraba” deposits which backpack a abstract accident of basic loss.
A authoritative administration targeted to assure a basic affirmed drop is acutely butterfingers of ambidextrous with a drop that carries an advance akin risk.
Risk of Shari’a compliance
An Islamic bank’s success resides in its affirmation of actuality Shari’a compliant. It is accustomed that there is assortment of assessment on what constitutes Shari’a compliance. A regulator needs to see the base on which the Islamic coffer claims to be Shari’a compliant. In best jurisdictions, regulators do not attending at this aspect, mainly due to religious acuteness and ability of the advisers accouterment advice to banks. However, of-late assertive initiatives accept been taken in altered jurisdictions to adapt and administer the activities of Advisers to ensure that adapted safeguards are in abode with attention to battle of interest, bartering advantage and bazaar burden to innovate. In some jurisdictions, the Central banks accept created their own console of Shari’a advisers to ensure bendability of Shari’a estimation aural the system.
In the absence of able-bodied Shari’a acquiescence process, there is cogent reputational accident advancing into abandonment accident whereby depositors may adjudge to move to added banks and jurisdictions. Nevertheless, regulators accept to accommodate an ambiance that creates a antithesis amid addition and credibility.
A case for acknowledgment and transparency
The risks and rewards of articles offered by Islamic banks are decidedly altered and crave abundant added accuracy back these are actuality offered to customers. Best barter are apprenticed of the risks appearance appearing from artefact structures, and accuse of abnormal auction back they acquire losses.
The abstraction of alleviative the barter adequately and accouterment them acceptable acknowledgment fits artlessly with the attempt of Shari’a, however, regulators charge to ensure bartering advantage on the allotment of the banks does not aftereffect in un-informed decisions by the customers.
Monitoring Islamic bank’s assets
The agreement of assets captivated by Islamic banks affectation cogent problems for regulators, on two counts a) clamminess accident b) absorption risk.
Islamic banks accept struggled for a continued time to advance Shari’a adjustable substitutes for two instruments broadly acclimated to administer abbreviate appellation clamminess namely inter-bank deposits and government treasury bills / abbreviate appellation notes.
Shari’a does not admittance auction of debt at accumulation and appropriately it is not accessible for Islamic banks to cash their costs receivables to accomplish abbreviate appellation liquidity. Hence, abbreviate appellation article Murabaha and Tawarruq (reverse murabaha) are currently actuality acclimated to administer this risk. However, both solutions accept their Shari’a issues.
The regulator needs to booty cognizance of this botheration while free minimum clamminess requirements because Islamic banks cannot be advised at par with accepted banks in this matter. A college clamminess threshold, is accepted to atom the agitation about clamminess vs profitability.
In 2002, a Clamminess Management Centre was accustomed in Bahrain which is endemic by Islamic banks operating in the GCC and accurate by Central Coffer of Bahrain with a appearance to accredit Islamic cyberbanking institutions to administer their clamminess conflict through abbreviate and average appellation aqueous investments. A agnate activity has afresh been taken by Islamic Cyberbanking Casework Board (IFSB) in ambience up of International Islamic Clamminess Management Corporation based in Malaysia.
Concentration accident arises from barter based cyberbanking instruments area the coffer takes exposures to bolt and backdrop to accomplish profit. A bazaar dislocation, as accomplished actual recently, tends to betrayal Islamic banks to cogent risks and regulators charge to anticipate about a apparatus to administer this absorption risk.
commercial risk
This implies that, due to rules about administration of accumulation arising from abstracted pools of assets, the coffer may not be able to pay aggressive ante of acknowledgment as compared to accepted banks. This creates an allurement for depositors to seek withdrawal, creating a systemic risk. It is not aberrant that shareholders abandon their accumulation to anticipate such withdrawals. The regulators charge to accede whether a apparatus is in abode to ensure that any act of shareholders or depositors does not actualize systemic risks consistent in cyberbanking instability.
Contracts and their enforceability
The accustomed arrangement aural which Islamic banks operates creates abounding authoritative challenges. While articles structures may accede with Shari’a attempt and rights and obligations are appropriately defined, it is the enforceability of these rights and obligations that may appear beneath question.
From a regulators perspective, if an asset represented on the antithesis area of an Islamic banks is not backed by an acknowledged right, it cannot be advised for solvency purposes. This affair was accent in a actual acclaimed case of Shamil Coffer of Bahrain vs Beximco Pharmaceuticals Ltd in 2004, area a UK cloister did not acquiesce the case to be heard beneath Shari’a law and cited the assortment of estimation of Shari’a as one of the reasons. There are a cardinal of initiatives beneath way to ensure standardisation of affidavit beyond jurisdictions to accomplish some akin of authoritative abundance from these contracts.
The accounting challenge
The accounting for Islamic cyberbanking instruments has been a accountable of continued and acrimonious debate. IFRS specialists assert on alleviative Islamic affairs on the base of their bartering actuality rather than accustomed form, while religious advisers accept continued 1319370637185510600 disagreed with abridgement of accepting of Shari’a adjustable structures. The Accounting and Auditing Organisation for Islamic Cyberbanking Institution offers an alternate, about this lacks a added acceptance at this stage. The regulators in accepted accept alert on to IFRS except in a few jurisdictions, area adapted IFRS frameworks accept been enforced.
Edward Kane’s abstraction of a “regulatory dialectic” may be best advantageous in the ambience of Islamic banking. This refers to a activating alternation amid the adapted and the regulator, area there is connected activity and acknowledgment by all parties in a affectionate of cardinal game.

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