Transcript BASLE FRAMEWORK AND THE ISSUES OF REGULATION, …

BASLE FRAMEWORK
AND THE ISSUES OF
REGULATION, SUPERVISION AND
CORPORATE GOVERNANCE
IN ISLAMIC BANKING
DR. M. UMER CHAPRA
RESEARCH ADVISER
IRTI/IDB, JEDDAH
THE NEED FOR INTERNATIONAL FINANCIAL REFORM
INTERNATIONAL FINANCIAL CRISES
HOW TO PREVENT SUCH CRISES FROM TAKING PLACE IN
THE FUTURE?
CALL FOR A “NEW ARCHITECTURE” FOR THE FINANCIAL
SYSTEM
BASLE COMMITTEE ON BANKING SUPERVISION (BCBS)
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THE 1988 BASLE CAPITAL ACCORD
BCBS,
INTERNATIONAL
CONVERGENCE
OF
CAPITAL
MEASUREMENT AND CAPITAL STANDARDS (1988)
A
SIMPLE
STANDARDIZED
ESTABLISHING MINIMUM
APPROACH
FOR
CAPITAL REQUIREMENTS
–
BANKS TO MAINTAIN CAPITAL ON THE BASIS OF FIVE
CLASSES OF BORROWERS (0%, 10%, 20%, 50% AND 100%)
 DID NOT DISTINGUISH BETWEEN THE RELATIVE DEGREES
OF
CREDITWORTHINESS
AMONG
INDIVIDUAL
BORROWERS
 APPLIED INITIALLY TO INTERNATIONALLY ACTIVE BANKS
IN THE G10 COUNTRIES
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BASLE II - 1996
GREATER FOCUS ON RISK MEASUREMENT AND
CONTROL
THE “THREE PILLARS”
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BASLE II (1)
“PILLAR 1”: CAPITAL ADEQUACY
 RISK ADJUSTED CAPITAL REQUIREMENTS
 THREE OPTIONS
 EXTERNAL-RATINGS BASED
 INTERNAL-RATINGS BASED
 MODELS-BASED
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BASLE II (2)
“PILLAR 2”: SUPERVISORY REVIEW
 TO EVALUATE THE RISK PROFILES OF INDIVIDUAL BANKS
 SPECIFY THE NEED FOR REMEDIAL MEASURES
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BASLE II (3)
“PILLAR 3”: MARKET DISCIPLINE
 ENHANCING THE DEGREE OF TRANSPARENCY IN BANKS’
PUBLIC REPORTING AND THE DISCLOSURES THEY MUST
MAKE TO LEND GREATER INSIGHT INTO THE ADEQUACY
OF THEIR CAPITALIZATION
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THE CORE PRINCIPLES (1997)
 BCBS, CORE PRINCIPLES FOR EFFECTIVE
BANKING SUPERVISION (1997)
 SETS OUT 25 BASIC PRINCIPLES THAT ARE
REQUIRED FOR AN EFFECTIVE SUPERVISORY
SYSTEM
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THE CORE PRINCIPLES (1)
 PRINCIPLES 1-5 : LICENSING AND STRUCTURE
 PRINCIPLES 6-15: PRUDENTIAL REGULATIONS
AND REQUIREMENTS
 PRINCIPLES 16-20: METHODS OF ONGOING
BANKING SUPERVISION
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THE CORE PRINCIPLES (2)
 PRINCIPLE 21: INFORMATION REQUIREMENTS
 PRINCIPLE 22: FORMAL POWERS OF
SUPERVISION
 PRINCIPLES 23-25: CROSS-BORDER BANKING
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REGULATION AND SUPERVISION OF ISLAMIC FINANCIAL
INSTITUTIONS (1)
TWO RESPONSIBILITIES:
 TO APPLY THE INTERNATIONAL STANDARDS
 TO COMPLY WITH THE SHARI‘AH
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ISSUES INVOLVED (1)
 CAPITAL ADEQUACY
 EVALUATION AND CONTROL OF RISKS IN THE DIFFERENT
ISLAMIC MODES OF FINANCE:
CREDIT RISK, MARKET RISK, LIQUIDITY RISK, INTEREST
RATE RISK AND OPERATIONAL RISK
MUDARABAH,
MUSHARAKAH,
MURABAHAH,
SALAM,
IJARAH, AND ISTISNA‘
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ISSUES INVOLVED (2)
 ACCOUNTING STANDARDS
 INTERNAL CONTROLS AND EXTERNAL AUDIT
 GREATER TRANSPARENCY
 DEPOSIT INSURANCE
 SHARI‘AH AUDIT
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CORPORATE GOVERNANCE
WHAT IS CORPORATE GOVERNANCE?
 PROTECT THE INTERESTS OF ALL STAKEHOLDERS BY
ENSURING FAIRNESS, TRANSPARENCY AND ACCOUNTABILITY
 WHY CORPORATE GOVERNANCE?
PRINCIPAL/AGENT CONFLICT OF INTERESTS
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DIFFERENT MODELS OF CORPORATE
GOVERNANCE
 ANGLO-AMERICAN MODEL
 FRANCO-GERMAN MODEL
 THE ISLAMIC MODEL: THE CONCEPT OF JUSTICE IN
ISLAM
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MECHANISMS FOR CORPORATE GOVERNANCE
BOARD OF DIRECTORS
SENIOR MANAGEMENT
SHAREHOLDERS
DEPOSITORS
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TOOLS FOR CORPORATE GOVERNANCE
INTERNAL CONTROLS SYSTEM
RISK MANAGEMENT CULTURE
 CREDIT RISK, MARKET RISK, LIQUIDITY RISK, INTEREST RATE
RISK AND OPERATIONAL RISK
ENHANCING TRANSPARENCY
LOAN ACCOUNTING AND DISCLOSURE
EXTERNAL AUDIT
SHARI‘AH CLEARANCE AND SHARI‘AH AUDIT
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THE NEED FOR INSTITUTIONAL INFRASTRUCTURE
FACTORS THAT ENABLED THE ISLAMIC SYSTEM
TO
WORK
EFFECTIVELY
IN
THE
CLASSICAL
PERIOD
CAN WE MAKE THE SYSTEM SUCCESSFUL NOW?
THE NEED FOR INSTITUTIONAL INFRASTRUCTURE
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INSTITUTIONAL INFRASTRUCTURE (1)
CREDIT RATING AGENCIES
CENTRALIZED SHARI‘AH BOARD
CHARTERED SHARI‘AH AUDITORS
SHARI‘AH COURTS AND BANKING TRIBUNALS
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INSTITUTIONAL INFRASTRUCTURE (2)
AUDIT ORGANIZATION
ISLAMIC FINANCIAL MARKET
LENDER OF LAST RESORT
TRAINING INSTITUTES FOR ISLAMIC BANKING
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CONCLUSION
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