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Islamic body to revamp rules to fit Basel III

Kuala Lumpur, November 30, 2010

The Islamic Financial  Services Board, an association of regulators in Muslim  countries, will revise its rules next year to enhance sharia  banks' capital in line with Basel III reforms, its  secretary-general said.

Rifaat Ahmed Abdel Karim said IFSB would seek its  council's approval in December to begin work next year on  amending the regulations, with the process expected to be  completed around 2013.

'We are revising the standard of capital adequacy to look  into the need for more capital and in what form will that  additional capital be,' Abdel Karim said in an interview,  adding that this could take the form of contingent capital.

He said the aim of the changes was 'not to put the Islamic  financial services industry at a disadvantage and to provide  them with a level playing field' relative to conventional  banks but did not elaborate on possible revisions.

Global regulators of convention banks, seeking to prevent  a repeat of the global credit crisis, agreed recently to force  banks to more than triple the amount of top-quality capital  they hold in reserve, though they were given time to raise  funds.

Islamic banks are governed by the respective regulatory  authorities in the countries where they operate and compliance  with IFSB's guidelines is voluntary.

The Kuala Lumpur-based IFSB, whose members include central  banks, the International Monetary Fund and lenders such as  Kuwait Finance House and Sharjah Islamic Bank, is one of two standards-setting bodies and issues  guidelines on the banking, capital markets and insurance  sectors.

The other is the Accounting and Auditing Organisation for  Islamic Financial Institutions in Bahrain, which traditionally  issued guidelines on accounting standards but has more  recently ruled on Islamic bond structures.

Abdel Karim said the IFSB's liquidity management  corporation, which will issue short-term instruments to help  Islamic lenders manage their cash, would give banks an  alternative to the widely used commodity murabaha money market  instrument.

'This will hopefully give depth to the capital market,' he  said. 'Liquidity management hasn't been addressed in a more  concerted way. This is the first time we see a number of  regulatory authorities cooperating to address the issue.'

A lack of liquidity management tools is seen as one of the  key challenges to the emerging Islamic finance industry, with  sharia banks handicapped partly due to the limited range of  products they can invest in.

The liquidity body may issue highly rated sukuk that would  be backed by central bank and corporate assets as early as  next year to help Islamic banks manage their liquidity and  create a liquid cross-border market for Islamic instruments.

It would have $1 billion in authorised capital and has $75  million in paid-up capital so far.

Islamic banks are now often forced to place the reserve  liquidity they need to maintain under central bank  requirements with international conventional banks through  commodity murabaha, as there are not enough highly rated sukuk  issues.

But some Islamic scholars say commodity murabaha is a mere  paper trail replicating conventional money market instruments  and only grudgingly accept its use as there is no alternative. - Reuters

Tags: banking | capital | Islamic | IFSB | Basel III |

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