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2020 | OriginalPaper | Buchkapitel

10. The Basel Accords and Islamic Banks

verfasst von : Zubair Hasan

Erschienen in: Leading Issues in Islamic Economics and Finance

Verlag: Springer Singapore

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Abstract

The primary cause of the colossal failure of financial institutions worldwide—banks in particular—in the wake of the 2007–2008 turmoil has been the heightened lure of leverage gains that led them to expand credit beyond what the volume and quality of their capital assets warranted. The devastation led to a major policy shift in finance at the national and international levels, with a focus on capital adequacy that financial institutions must observe for their own safety as well as for the wider social interest.

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Vorheriges Kapitel Monetary Policy: Credit Creation and Control

Nächstes Kapitel Systems’ Convergence: Boon or Bane?

Nur mit Berechtigung zugänglich

If R is the risk-free rate of interest and α the risk premium, the rate of interest charged on loans R_L will be determined as follows: R_L = (R + α). Likewise, if the risk discount rate β is the rate of interest R_D on deposits, it would be expressed as R_D = (R − β). The formulations will yield gross bank margins as equal to R_L − R_D = (R + α) − (R − β) = (α + β), where α need not be equal to β [(α + β)/total assets] gives the margin coefficient for interbank profitability comparisons. However, in the Islamic profit and loss sharing system, why R should be discounted is tenuous.

Maturity transformation is the bank practice of borrowing on shorter time durations and transforming these short-term funds into loans of longer maturity. This is possible due to the fractional reserve banking system where banks hold reserves less than the amount of their customers’ deposits. This concept is applicable to businesses as well, which tend to transform the short-term loans that they borrow from commercial banks into long-term ones through a renewal or rollover process, which benefits banks as well.

The falling US housing prices and rising delinquencies on the residential mortgage market could lead to losses of US$565 billion. When combining these factors with losses from other categories of loans originating, and securities issued, in the United States related to commercial real estate, potential losses were put at about US$945 billion. The US$945 billion estimate of losses represents approximately US$142 per person worldwide and 4% of the US$23.21 trillion credit markets. Global banks are likely to carry about half of these losses. The loss figure of US$945 billion is just an estimate; the actual amount may even be higher (IMF Global Financial Stability Report, 2008).

Under the Basel Accords, in the event of a winding-up, depositors’ funds rank in priority before capital, so depositors would only lose money if the bank makes a loss that exceeds the amount of capital it has.

The group includes France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK, the US, and Luxembourg (G-10) in addition to Spain.

Capital inadequacy refers to the possibility of a financial institution being hurt by an unexpected loss. To ward off such an eventuality, Basel I categorizes the assets of these institutions with reference to such a risk into five categories (0, 10, 20, 50, and 100%). Banks that operate internationally are required to have capital adequacy—a minimum of capital—that would keep the weight of such risk at 8% or less. Basel II modified the categorisation.

The tiers are regulatory capital types defined in the Basel Accords for estimating capital adequacy levels for banks. Tier 1 is the core capital or basic equity. Tier 2 is supplementary capital. Tier 3 consists of short-term subordinated debt covering market risk, while Tier 4 refers to a variety of hybrid debts. The increase in tiers makes regulation progressively more stringent.

Chapter 8 has reviewed current measures used for credit control and proposes a technique for limiting the leverage gains in a dual banking framework.

Losses in most banks during the financial crisis had been significantly higher than the minimum capital requirements under the former Pillar 1 market risk rules. A key point of the 2009 amendment was an additional response to the crisis, requiring banks to calculate a ‘stressed value at risk’ relating to significant losses.

The revised market risk framework comes into effect on 1 January 2019.

The revised market risk frame work has come into operation since 1 January 2019.

Although the Corporation’s headquarters is located in Kuala Lumpur, it has been established by central banks, monetary authorities, and some multilateral organizations to create and issue Shari’ah-compliant short-term financial instruments to facilitate effective cross-border Islamic liquidity management. The IILM Governing Board comprises the Islamic Development Bank Group, Bank of Indonesia, Central Bank of Kuwait, Banque Centrale du Luxembourg, Bank Negara Malaysia, Bank of Mauritius, Central Bank of Nigeria, Qatar Central Bank, Central Bank of the Republic of Turkey, and the Central Bank of the United Arab Emirates.

Ahmad, et al. (2014). Empowerment Through Microfinance: The Relation Between Loan Cycle and Level of Empowerment. World Development, 62(C), 75–87.

Carroll, J. H. (2014). Hawser. Grapnel Books.

Hasan, Z. (2011). Islamic Home Finance in the Social Mirror. ISRA: International Journal of Islamic Finance, 3(1), 7–24.

Titel: The Basel Accords and Islamic Banks
verfasst von: Zubair Hasan
Verlag: Springer Singapore
Buch: Leading Issues in Islamic Economics and Finance
Print ISBN: 978-981-15-6514-4

Electronic ISBN: 978-981-15-6515-1

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-981-15-6515-1_10