KARACHI: The State Bank of Pakistan (SBP) on Thursday said it was expediting its efforts to implement revised capital standards for the Islamic banks to ensure that Shariah-compliant lenders are well-placed to meet tough Basel III regulations.
“The assessment/feasibility of adaption of revised capital adequacy standard (IFSB-15) is in final stage; however, the decision of its implementation depends on the results/findings of its qualitative and quantitative analysis and after considering relevant legal and regulatory concerns in consultation with stakeholders,” the central bank said in an email response to The News.
The IFSB-15 provides global capital adequacy standards set by the Malaysia-based Islamic Financial Services Board for the institutions offering Islamic financial services. Islamic banking institutions in Pakistan need strengthening their capital adequacy position in view of evolving regulatory requirement till 2019.
The SBP had implemented Basel III reforms to further enhance the capital related rules in 2013 in a phased manner with full implementation intended by December 31, 2019.
Bankers said the implementation of IFSB-15 guidelines on Islamic financial institutions would help align the industry to global practices. It could make the capital framework more robust and improve confidence in the Islamic banking industry.
“Based on the unique nature of Islamic banking institutions and participatory nature of Islamic banking deposit, the adoption of IFSB standard on capital will be very helpful to promote this sector,” said Ahmed Siddiqui, head of product development and Shariah compliance at Meezan Bank.
Siddiqui added that it would also be in line with the nature of Islamic banks and help strengthen the SBP’s resolve to make Islamic banking as a preferred choice of banking. The assets and deposits of Islamic banking industry are growing at a decent pace of 11.9 percent and 13.7 percent, respectively. However, their capital adequacy ratio [CAR] fell to 12.94 percent at the end of 2016 from 13.75 percent in 2015. Though their CAR was above the required level of 10.65 percent, but CAR of Islamic banks remained below the conventional banking industry’s level of 16.45 percent in 2016.
“The main reason for relatively lower CAR is the significant growth of risk-weighted exposure due to increase in financing by Islamic banks, which in a way has improved the utilisation of available capital buffer,” the SBP said in its financial stability review published last year. Islamic banks are profitable and liquid but their profit margins and liquidity levels are, however, lower than their conventional counterparts, according to the IMF report on the Islamic banking.
Analysts said Islamic banks are facing trouble in raising capital. The expansionary focus of IBs also demands more capital cushion.
“Under the IFSB-15 principles, banks could [engage in] financing and make investment(s) under profit-sharing and loss-bearing modes (Mudarabah) that is counted by IFSB-15 as [a] component of international financial institutions’ tier-2,” an analyst said.
Islamic banks are planning issuing sukuks in a bid to boost their capital. Recently, Meezan Bank has intended to issue Rs7 billion worth of a tier-1 sukuk in the domestic market. The Basel III, which is aimed at developing more resilient and sustainable financial sector focused on liquidity risk management along with improving the quality and quantity of capital, is a reflection of this.
The SBP admits that Islamic banking industry is facing dearth of Shariah compliant investment opportunities, limited availability of Shariah compliant money markets/instruments and Shariah compliant alternate of standing facilities.
In Pakistan, issuance of domestic sovereign sukuk since 2008 did provide some relief to the domestic industry for its liquidity management but the gap between demand and supply could not be bridged due to infrequent issuance of sukuks, owing largely to issues regarding documentation, title of assets, taxation etc.
