Basel III and Islamic finance

The Secretary-General of the Islamic Financial Services Board (IFSB) underlined the implications of Basel III on Islamic finance in a speech on before Ramadan.

He confirmed that the IFSB is reviewing Sharia requirements and the balance sheets of institutions offering Islamic financial services (IIFS) against the proposed Basel liquidity parameters so that these specificities are fully considered in the calculation of ratios.

The IFSB are concerned with three factors hampering the performance and competitiveness of IIFS vis-à-vis conventional financial institutions. These factors are:

• A shortage of Sharia-compliant securities

• The lack of active Sukuk trading

• A lack of a reliable Sharia-compliant deposit insurance scheme.

The shortage or unavailability of Sharia-compliant securities/Sukuk in many jurisdictions compels IIFS to maintain a higher level of cash and non-earning liquid assets than conventional institutions. In those jurisdictions where Sharia-compliant securities/Sukūk are available, the lack of an active trading or repurchase (repo) market remains an ongoing problem.

More generally, the IFSB note that in the majority of jurisdictions there is a lack of Sharia compliant lenders of last resort to protect the soundness and stability of IIFS in situations of serious liquidity stress.

In most jurisdictions deposits and profit sharing investment accounts of the IIFS are not covered by a reliable Sharia-compliant deposit insurance scheme.