Islamic banks urged to develop more instruments to manage risks

ISLAMIC financial institutions (IFIs) should develop more products for them to better manage risks, in light of the recent financial crisis that has affected public image and trust in the global banking sector, experts said here yesterday.

The secretary-general of Islamic Financial Services Board (IFSB) said that Islamic banks were more conservative than their mainstream counterparts and generally had the capital required under the new Basel III framework, which began implementation last year.

"There is a very high ratio of Tier One capital and common equity (among IFIs), which is loss-absorbing and the kind of capital that Basel III has brought in now for conventional banks," Jaseem Ahmad said.

"When I say that our banks have been conservative, what I mean is that they have not generally engaged in the kind of very rapid (and very risky) expansion of asset and credit that conventional banks have. So, Islamic financial banks are well-capitalised," he added.

Although Islamic banks had a high level of liquidity, Jaseem said since it was in the form of cash, it lacked the depth necessary to effectively manage risks. This gave the banks room for "substantial improvement" in the equity management framework in Islamic finance, he added.

"In that sense, there is still a shortage of Syariah-compliant instruments (or) securities. A capital market is being developed but it is still not as liquid or as deep as we would want it to be. And it needs to be deeper," he told The Brunei Times.

"We need to have more instruments to give Islamic banks greater opportunity for this management than they currently have."

The long-term objective was then to ensure that Islamic banks had access to a wider range of instruments, while also encouraging them with incentives and the provision of resources to strengthen their respective capabilities.

"You can have high level of capital loss absorbing capital but if your risk management framework is not strong and if your conduct is geared towards risky activities, then there will be problems for any bank, even if it is an Islamic bank," Jaseem said.

The secretary-general of the Kuala Lumpur-based international standard-setting body for IFIs was speaking on the sidelines of an IFSB seminar discussing Syariah issues on regulatory capital and risk management, held at a hotel in Gadong. One of the guest speakers of the seminar, the CEO of CIMB Islamic Bank Bhd of Malaysia, Badlisyah Abd Ghani discussed the issues surrounding alternatives for Syariah-compliant subordinated debt and hybrid capital as well as structuring Syariah-compliant substitutes for convertible contingent capital, under the Basel III framework.

Based on Malaysia's experience, Badlisyah said in his presentation on regulatory capital that there was "no Syariah issue" in converting debt to shares if the required features were clearly stated in Sukuk structure. However, he cautioned that it may require additional structure based on Bai Inah or Commodity Murabaha.

This would also lead to the bank incurring additional costs such as the brokerage fees in determining the share price.

"However, there will be insufficient acceptable assets (fixed assets or Iljirah assets) to be the underlying assets as some Syariah scholars do not allow trading of sukuk which are sale-based 'receivable' assets," Badlisyah said.

The Brunei Times