Improving Banking Supervisory Mechanisms
In the OIC Member Countries
2
 Tackling with financial stability, pro-cyclicality and macro-prudential regulations
Even though every OIC country may have a different economic structure, financial
stability is a common problem for all member states. Financial stability issues require
correct diagnosis of potential instabilities and finding right financial and monetary
tools to tackle them. Fast credit growth and vulnerability against sudden capital
movements are the main financial stability problems faced by OIC countries. Various
countries such as Kazakhstan and Nigeria have faced sharp volatility in their
economies, causing abrupt changes in their banking systems. The Turkish Banking
Supervisory authority together with the Turkish Central Bank have conducted some
innovative and successful preemptive measures to deal with financial stability issues.
This and other experiences conducted by other member states can be communicated
effectively among members hence collaboration among member countries, is necessary
to handle financial stability issues. However, rapid credit growth and potential credit
risk may lead to future financial instability for OIC member states. As stated by the IFSB
summit, developing a macroeconomic stress testing procedure for OIC member states
would be very beneficial.
 Financial Stability, Monetary Policy and Banking Supervision
Recently, the role of monetary policy and banking supervision began to create some
conflicting results. Some countries such as the UK chose to combine monetary policy
and banking supervision under the Bank of England. Coordination of banking
supervision and monetary policy is critical and OIC member states should discuss how
monetary policy and banking supervision can be coordinated towards a more effective
regulation and supervision scheme.
 Supervisory and Regulatory Needs of Islamic Banking
Islamic banking has been growing quite rapidly in recent years. Although it has some
advantages over conventional banking, Islamic banking in OIC countries faces some
challenges. The minimal use of complex derivatives is the major advantage of Islamic
banking over conventional banking. However, relatively less liquid Islamic banking
products may pose problems in complying with some of the criteria imposed by new
financial regulations. In addition, since there are relatively few parties trading Islamic
banking products, counterparty risk may cause some additional challenges for Islamic
banking.
 Conclusion
The banking sector in OIC member states has a strong growth potential in comparison
with developed economies. However, potential financial stability issues and getting
prepared for future capital and liquidity requirements are important challenges faced
by member states. Member countries do have varying experience and expertise on
banking supervision therefore, collaboration and cooperation on banking supervision
activities among member states would be beneficial to improve banking practices. Since
countries have similar risk factors, a common supervisory framework including a
common stress testing methodology would be advantageous for member countries.