Improving Banking Supervisory Mechanisms
In the OIC Member Countries
85
(8). Conclusion
Banks in OIC countries did not feel the big repercussions of the recent financial crisis. This may
be related to various factors, including the relatively smaller size of the banking sector in these
countries relative to US and Europe. However, the banking sectors of these countries are
growing rapidly, and the global environment is becoming more challenging. Therefore,
countries in this region need to be ready for a different banking practice. Basel III
requirements will change banking practices both quantitatively and qualitatively. Loan
portfolios of almost all OIC countries have grown since the global credit crisis. This requires an
additional supervisory effort on credit risk measurement and management. Local credit rating
and loss given default calculations will become important for OIC countries. Since the
properties of each of these countries differ from Europe and the US, a different credit rating
data and methodology might be necessary. One suggestion would be to establish national
rating companies similar to the Turkish experience. In addition, until 2018 more capital and
liquidity is required in global banking. Until this period, capital adequacy ratios and liquidity
provisions will be calculated differently. These changes require a collaborated effort among
member states. Since these changes require different experience and expertise, a know-how
transfer among member states will be extremely beneficial for the whole OIC community. To
deal with financial stability issues in OIC countries, the establishment of an Islamic Financial
Stability Board could be an alternative to discuss. Since banking and financial problems in OIC
countries are different, exchanging available know-how within the Islamic countries can
enhance banking supervision. In addition, COMCEC's strategy document in 2012, clearly states
that member countries need to improve quality of regulation, supervision and cooperation
among its supervisory bodies.
Table 40: Summary: What are the weak and strong points of banking supervision in OIC
Countries
Current level Remarks
What can supervisors do to
measure the true risk?
Credit Risk
Relatively high There is high capital
buffer
 Standard measures can
understate the actual risks
 Credit Rating methodology is
necessary.
 Informality and lack of good
quality data is a challenge.
Market Risk
Relatively less Accounting treatment of
securities is critical.
Trading book is very
small. So MR can be
underestimated.
 Risk sensitive measures such
as VaR, ES should be
accompanied with standard
risk measures.
 Stress VaR needs to be
estimated
Operational Risk
Higher than market
risk
As banking sectors are
growing Op. Risk could
grow
Op.Risk Data should be
collected for advanced
measurement
Interest Rate Risk
Potentially high but
data on maturity of
assets and liabilities
is hard to find.
As balance sheets are
growing it should be
watched
Asset and liability durations
of each banks can be
calculated
Liquidity Risk
Relatively better
than EU and US
banking
Could be important as a
supplementary tool for
stress testing
Useful to make a QIS on LCR
and NFSR