Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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 OIC countries seem to have relatively stronger restrictions on permissible banking
activities. This issue is particularly important because banks engaging in insurance,
securities and real estate activities will create hardship in regulatory practices.
Supervisory authorities in member states should continue their efforts in this regard and
avoid banking sector pressures which stem from profitability considerations.
 Although explicitly analyzed in the previous sections, systemically important financial
institutions and their regulation is not covered by the World Bank Regulation and
Supervision Survey. Most OIC countries are adopting international measures and taking
steps to define systemically important institutions. Regulations regarding macro-
stability and systemic risk should be implemented according to the guidelines laid out by
Basel III.
 OIC countries, on average, perform well with respect to private monitoring and external
governance. Most OIC countries accommodate external auditors to the supervision
structure and have kept up with international standards, according to the World Bank
Survey.
 Derivative trading is not common in the OIC banking system; however, as their strong
financial development continues, we expect a deepening in the product structure of
banks, which will certainly complicate regulatory practices. Supervisory authorities
should be prepared for newly engineered products and timely intervention to regulate
them.
 Most OIC countries possess an Islamic banking sector as well as the conventional
banking sector, and Islamic banking is growing at an increasing rate. Currently, Islamic
banking is regulated under the law designed for the conventional banking system. In
most OIC countries, there is no separate law for Islamic banking. It is apparent that the
mechanisms of conventional and Islamic banking are different, and significant growth in
Islamic banking calls for a different supervisory mechanism. OIC countries should take
the necessary steps to make supervision practices comply with the development in
Islamic banking.
6.2 Changing Role of Supervision in OIC Countries after Basel III?
New regulatory frameworks will give rise to a more critical and demanding bank supervision.
Below, we summarize the changing roles of supervision in OIC Countries.
(1) Financial Disclosure and Banking Supervision
Accounting for off-balance-sheet items will become extremely critical with Basel III, for many
reasons. First of all, the new leverage ratio will be calculated on the basis of on-balance-sheet
and off-balance-sheet items. The use of accounting and correct disclosure of off-balance-sheet
items will be much more important than before. Therefore, more supervisory effort should be
paid to the financial disclosures of banks. For better banking supervision, better knowledge of
derivative pricing and derivative accounting will be necessary.