Specific Stability Risks in Islamic Banking

Transcription

1 Specific Stability Risks in Islamic Banking Dawood Ashraf Ph.D., CFA Senior Researcher Islamic Finance Disclaimer: The views expressed in this presentation are those of the author and do not necessarily reflect the views of the Islamic Research and Training Institute or the Islamic Development Bank Group. 21 December

2 USD (Billions) Islamic Finance Sector Development 2,000 1,800 1,600 1,400 1,200 1, Islamic Banking Sukuk Asset Management Takaful Total assets Source: IDB Staff compilation from the data obtained from multiple sources 21 December

3 Business Model of Islamic Banks Asset-liability structure (debt versus equity) Product offering (Contract based) The business model on which banks base their operations has serious consequences for the stability of banks (IMF, 2011) Prior to 2008 the NSFR of investment banks declined more sharply as compared with commercial banks. Islamic banks are generally better capitalized as compared with conventional banks (Beck et al., 2013) The equity-based and risk-sharing nature of Islamic contracts helps reduce the maturity mismatch of assets and liabilities and enhances financial stability. 21 December

4 Islamic banking: Risk Sharing 100% Salam Istisna Mudarabah Qard Hasan Musharakah Other Leasing & Hire Purchase Murabaha & Deferred Sales 90% 80% 70% 60% 50% 40% 30% 20% 10% Source: IBIS Online 0%

5 Islamic banking: risk sharing Islamic banks - Type of instruments Equity like instruments Debt like instruments 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: IBIS online

6 Islamic Banking Real sector investment Agriculture Transportation Service Trading Manufacturing Banks & Financial Institutions Real Estate & Construction Others Commodity 0% 5% 10% 15% 20% 25% 30% Source: IBIS online

7 Risk factors specific to Islamic Banks Is risk sharing model - risk mitigating? Liabilities predominantly profit sharing investment accounts (PSIAs) Restricted PSIA Unrestricted PSIA Nature is deposit practice is deposit Assets - predominantly fixed rate Murabaha contracts 21 December

8 Asset side risks Profit rate risk Specific sector exposure risk Real estate exposure risk Commodity price fluctuation risk Agriculture Transportation Service Trading Manufacturing Banks & Financial Institutions Real Estate & Construction Others Commodity 0% 5% 10% 15% 20% 25% 30% December

9 Regulatory requirements for stability BASEL I BASEL II BASEL III Saving & Loan Crisis Capital Adequacy Requirements An update of Basel I More sophisticated method for calculation of risk Three Pillars: Credit, Market and operations Risk Two new additional measures introduced under BASEL III LCR for liquidity and NSFR for funding stability 21 December

10 What led to Basel III? Too much leverage and insufficient high-quality capital to absorb losses Excessive credit growth and underpricing of risk High degree of systemic risk Inadequate capital buffers to maintain lending in times of stress Insufficient liquidity buffers 10

11 Stability Challenge: Islamic Banking sector Proportion of total banking assets under Islamic banks increasing resulting into systemic importance of Islamic banks. Systemic importance of Islamic banks increasing 15 countries are having more than 10% of banking assets in Islamic banks. Iran and Sudan are having 100% of banking assets under Islamic banks. Need for separate regulatory framework IFSB s Adjusted NSFR as measure for funding stability 21 December

12 Net Stable Funding Ratio for Islamic Banks Islamic Product Conventional Counterpart Nature of contract for Islamic bank Haircut under Basel III Haircut under IFSB Current accounts Current Account Debt 50% 50% Qard or wadi ah Deposits Debt 50% 50% Profit-Sharing Investment Accounts (PSIAs) Deposits Equity 95% - PSIA (Restricted) Deposits equity 95% 0% PSIA (Unrestricted) Deposits Hybrid 95% 95% Sukūk Debt - 100% Murabahah Loans and Advances Debt 85% 85% Musharakah Loans and Advances Equity 85% 50% Ijarah Mortgages and Leases Hybrid 50%-65% 50% Qard-al-Hassan Loans and Advances Debt 85% 0% Salam and istisna a Hybrid Hybrid - 85% 21 December

13 A study on factors affecting the stability of Islamic banks Sample and Data sources Islamic Banks and Financial Institutions Information (IBIS) database Why IBIS database? There is a difference in variable definition under Islamic and conventional banks for the calculation of the NSFR of Islamic banks, we need data on Islamic products based on the underlying Islamic financial contract (e.g. Musharkah or Mudarbah) The use of the IBIS data set makes this study more valuable as it utilizes Islamic bank data measured and reported through the Islamic banks reporting framework and is thus more reliable. Final Sample: 133 Islamic banks from 30 countries Macroeconomic data from the World Bank website 21 December

14 Empirical Findings NSFR has positive effect on Islamic banks stability Smaller Islamic banks are more stable than larger Islamic banks (Cihak and Hesse, 2010) Banks with diverse income sources are more stable. Banks with higher cost-income ratio are less stable Global Financial Crisis has no effect on the stability of Islamic banks. Market competition hurts financial stability of Islamic banks There is no effect of constitutional religiosity on bank s stability. Banks under fully Islamic banking systems are less stable 21 December

15 Conclusions Due to structural changes there is a need for separate Islamic banking regulations. IFSB s adjusted NSFR measure serves the purpose. Islamic banks, on average, are sufficiently funded during our sample time period. NSFR has the capability to increase the financial stability of Islamic banks. Our findings validate IFSB s adjusted NSFR for Islamic banks Regulators should implement IFSB s adjusted NSFR instead of conventional NSFR under BASEL III for Islamic banks. 21 December

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17 Contacts of the presenter Contacts of IRTI Website: Phone: +966 (0) Disclaimer: The views expressed in this paper are those of the author and do not necessarily reflect the views of the Islamic Research and Training Institute or the Islamic Development Bank Group. Fax: +966 (0) P.O. BOX Jeddah Kingdom of Saudi Arabia 21 December