The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released draft guidelines on liquidity risk management for Islamic banks and a new standard for regulatory supervision, as the industry body tightens oversight of the banking practices prevailing in Malaysia.
IFSB guidelines allow national financial regulators to have the final say on how they apply standards, but its prescriptive approach is gradually helping to harmonise practices across the industry’s core centres in the Middle East and southeast Asia.
Islamic banks face uncertainty over how regulators will treat their deposits, compounded by a lack of well-developed Islamic securities markets locally.
The IFSB’s guidance note on liquidity management aims to clarify the accounting treatment of Islamic deposits and defines the types of high quality liquid assets (HQLA) that Islamic banks can hold to meet regulatory requirements under the Basel III banking standards now being phased in around the world.
HQLA can range from cash and central bank reserves to sukuk (Islamic bonds) issued by both sovereigns and corporates, subject to various haircuts, the IFSB said.
Given the shortage of such instruments, the IFSB outlined three other actions which regulators could take to facilitate the industry: liquidity facilities from central banks, allowing banks to hold HQLA in international currencies, and widening HQLA criteria.
This would help Islamic banks meet Basel III liquidity coverage ratios that are being phased in from 2015 to 2019; a net stable funding requirement will be implemented in 2018.
Regulators will have to determine the rights of bank customers to withdraw their Islamic deposits to define the weights, or run-off rates, that apply to these, the IFSB said. It added that developing sharia-compliant deposit insurance schemes would be required if deposits were to be considered “stable” under Basel rules.
Regulators must also decide on the treatment of Islamic deposit holders, who must be classified as investors, as a liability to the bank, or as a mix that is partly risk- absorbent, the IFSB said.
The IFSB also published a draft standard on core principles for regulation and supervision of the industry, which will come into effect in January 2016.
These broadly mirror the Basel core principles, while addresing other issues such as the treatment of Islamic window operations, which are sections of conventional banks that operate according to Islamic religious principles.
The draft standard requires windows to have a minimum amount of funding from the conventional parent, and makes sharia supervision comparable to that of full-fledged Islamic banks.
Originally published on www.themalaysianinsider.com