Risk Management in
Islamic Financial Instruments
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5.8 EXTERNAL CONTROLS AND LEGAL SYSTEM
In addition to internal control mechanisms, IFIs must comply with the regulations of central
banks and other international organizations. The Basel Committee for Banking Supervision
(BCBS) publishes Basel capital adequacy requirements for banks that help them to keep the
adequate level of capital as a cushion against risk. However, IFIs have differing opinions on the
role of Basel regulation and the requirement of more or less capital, compared to conventional
counterparts. Banks are slowly moving towards an internal rating system that will decide the
capital adequacy of each bank. IFIs, with few exceptions, are yet to follow that lead.
A portion of IFIs are still of the opinion that the Basel committee capital regulation should not
be considered for IFIs. In order to minimize this problem, central banks of Islamic countries
have already introduced modified versions of the Basel capital requirement guidelines for the
Islamic banks of their regions. As the Basel guidelines are slowly moving towards an internal
rating based capital adequacy approach, all the IFIs have to invest to develop their internal
efficiency. In this respect, respondents believed that the capital requirements of IFIs should be
different in many cases. More than 50 percent of the respondents supported different levels of
capital requirements for IFIs.
Figure 5.10: Capital Requirement of IFI and Conventional Banks
5.9 ARE IFIS HAPPY WITH EXISTING RM SYSTEM?
With the existing limitations, are the respondents happy with the risk management system of
their banks? Over half of the respondents were not happy with the existing system. The Islamic
financial system is growing very fast at over 15 percent rate every year. The industry will face
more challenges in the future and IFIs have to be ready with strong internal and external
systems to face those challenges. Figure 5.11 is an indication that bankers want to do more
with their risk management systems. They know about their limitations and would like to
bring positive changes to risk the management frameworks in their banks. The chart also
less
28%
Same
44%
More
22%
Others
6%