MANAMA: In line with its role for the Islamic Financial Services Industry (IFSI), the General Council for Islamic Banks and Financial Institutions (CIBAFI), the global umbrella of Islamic financial institutions, announced that it has submitted the collective feedback of its members to the Basel Committee on Banking Supervision (BCBS) on the latter’s Consultative Document on Standardised Measurement Approach for Operational Risk which was available for a three-month public consultation period, starting from 4 March 2016 to 3 June 2016.
CIBAFI thanked the BCBS for giving the opportunity to the IFSI to comment on the Consultative Document before the proposed removal of Advanced Measurement Approach (AMA) from the regulatory framework, and replacing it with the Standardised Measurement Approach (SMA).
The comments CIBAFI provided were broadly in three main categories: 1. Withdrawal of internal modelling, 2. Distinctive type of risk in Islamic banks: Shariah Non-Compliance Risk (SNCR), and 3. Distinctive banking account of Islamic banks: Treatment of Profit Sharing Investment Accounts (PSIAs).
Firstly, CIBAFI acknowledged the inherent complexity of the Advanced Measurement Approach (AMA) and the lack of comparability arising from a wide range of internal modelling practices. Based on CIBAFI’s observation, the AMA is used by only a relatively small proportion of Islamic banks (mostly the largest banks). Therefore, CIBAFI expects the withdrawal of internal modelling to have a very limited impact on Islamic banks globally.
Secondly, on Shariah Non-Compliance Risk (SNCR) for Islamic banks, which is one of the key specific risks that distinguishes Islamic banks from their conventional peers, CIBAFI notes that this type of risk is not addressed in the BCBS Consultative Document. Hence, CIBAFI took this opportunity, to seek out to BCBS on how this should be handled with respect to the options being either Pillar 1 or Pillar 2. Based on comments received from CIBAFI members, it is proposed that the SNCR belongs to reputational risk which in any event remains a Pillar 2 item.
Lastly, CIBAFI highlighted the need to clarify the classification of the income derived from the Profit Sharing Investment Accounts (PSIA). Indeed, to apply the proposed SMA to Islamic Banks’ PSIAs, it will be necessary to map the banks income from these accounts to the Business Indicator definitions of the BCBS CD. Specifically, income from PSIA can be treated either under “Interest, operating lease and dividend”, or may be mapped to “Services”, which considers PSIAs as asset management activities generating fee and commission income. Without guidance on how this should be done, there will be a risk that different regulators will specify different treatments based on their treatment for other purposes, and this may lead to unjustified inconsistency in the operational risk capital requirements.
CIBAFI acknowledges that as there are different views among regulators, so there are different views among Islamic banks globally as to what the correct classification of PSIA within the Business Indicator framework should be. Therefore, CIBAFI believes that the treatment of PSIAs can be subject to supervisors’ discretion, taking into account different practices on PSIAs across jurisdictions. However, it would be helpful if the practical impact of different treatments could be assessed as part of the QIS, so that it would be possible to judge whether these do in fact lead to material differences in capital requirements.
In its submission to the BCBS, CIBAFI expressed its appreciation of the work that the BCBS does to maintain sound regulatory practices and highlighted the need for the BCBS to align its work recognizing the Islamic financial industry’s considerations.
In addition to policy and regulatory advocacy, CIBAFI continues to support the Islamic Financial Services Industry through various activities and initiatives. These include providing industry stakeholders with a platform to discuss emerging issues, representing the industry at major global financial events, and sharing knowledge through specialized publications and comprehensive training programmes.
