Implications of Basel III
On Islamic Banks
Table of Contents
Literature Review 3
Capital Requirements 7
Leverage ratios 10
Liquidity ratios 11
The application of the liquidity ratios 12
Basel III is the latest global regulatory standard on bank capital adequacy and liquidity. It was introduced mainly to prevent a repeat of the recent financial crises by taking into account various points in the Basel II agreement and strengthening them. Compliance with these international rules has become even more ...view middle of the document...
Basel III was created primarily due to the effects the recent financial crises had on the world. Conforming to it is one of the top priorities of banks around the world.
Islamic finance: Basel III - Islamic banks hold Basel III advantage Regulation - Kara, H. (2011, July)
This article explains that bankers believe that Islamic banks will also be affected by Basel III, just like conventional banks. Islamic banks generally find it easier to comply with these rules since the in-principle Sharia’a laws are already along the same lines as that of Basel III. Additionally, in most cases, Islamic banks’ capital is largely Tier 1. In the Middle East, an average of 80% of Islamic banks’ capital is Tier 1. Although both Islamic and conventional banks will face liquidity constraints, it will impact the conventional banks exponentially more than Islamic ones.
The article also says that even though Islamic banks may have some poor quality assets, their capital structure mostly comprises tier 1 capital in the form of common equity. This means that they are not exposed to excessive risk like many conventional banks are. Moreover, Shariah-compliant banks usually have higher capital adequacy ratios. Since Islamic finance offers limited ways of raising alternative forms of capital, Islamic banks do not have subordinated debt and have fewer preference shares. (Kara, 2011).
Islamic Banking by the Book - Hawser, A. (2011, February)
According to this article, the enforcement of Basel III on Islamic banks is punitive since they have to comply with standards imposed as a direct result of the financial crises which they played no part in causing. Thus these regulations should be imposed on conventional banks only. The article states that in terms of capital requirements for Basel III, Islamic banks barely need to change their current ratios. However the requirements of liquidity risk management is unfairly constrictive towards Islamic banks. The article recommends publishing an amended agreement specifically for Islamic Banks such that they can benefit as well (Hawser, 2011).
Since the Basel III agreement was released in late 2010, there is still limited research about it. Our paper focuses on the costs Islamic and conventional banks will have to undergo to comply with its capital requirements.
Issues in regulating Islamic Finance – Parker, M. (2011)
This article by Parker (2011) discusses the various aspects of regulation of Islamic finance. Among the different regulations are the latest Basel III guidelines. As the author explains, managing liquidity has long been a problem for the regulators. He gives concrete examples on how liquidity problems are being managed in a variety of countries, one example being Malaysia. Besides addressing this aspect of Islamic banking, Parker also explains how it is necessary to familiarize people with the different realms of this sector. In order to gain acceptance for it, there needs to be more consumer education and...