Improving Banking Supervisory Mechanisms
In the OIC Member Countries
74
Table 38: Islamic Banking Average Liquidity Ratio
2005 2006 2007 2008 2009 2010 2011 2012
Turkey 82 90 91 84 86 79 86 85
Malaysia 60 91 90 60 55 56 58 57
Saudi Arabia 58 91 100 90 93 89 77 75
UAE 74 72 65 63 61 67 66 69
Pakistan 95 120 103 90 93 148 123 95
Source: IFSB
- Coordination and Cooperation in Islamic Banking
Even though the current liquidity level of the selected member countries is satisfactory, in the
future, relatively more liquid Islamic money market instruments will be needed. In this
context, one welcome development was the establishment of the Islamic Financial Services
Board (IFSB) in 2003. Since its establishment, the IFSB has issued 22 standards and guiding
principles. The last principle is related to Shariah-compliant money market instruments with
primary objective to issue Shariah-compliant financial instruments in order to facilitate more
efficient and effective liquidity management solutions for Islamic financial institutions, as well
as to facilitate greater investment flows of Sharia-compliant instruments across borders.
To conclude, by referring to the Islamic Financial Services Industry Stability Report (2014), the
liquidity side, the challenge is to give Sukūk the features of high-quality liquid assets (HQLA) to
meet Basel III requirements regarding the Liquidity Coverage Ratio (LCR). This necessitates a
deep and liquid secondary market and fixed-income paper with no price risk. On the
capitalization side, the challenge is to give Sukūk the features of loss-absorbing capital to meet
the Basel III requirements for additional Tier 1 and Tier 2 capital.
The Dubai Financial Services Authority (DFSA), for example, while appreciating the prompt
work on the part of the IFSB in issuing the revised capital adequacy standard for IIFS (IFSB-
15), believes that Islamic banks are not likely to find it overly challenging to comply with the
enhanced capital requirements coming out of Basel III, though they might find meeting the
enhanced liquidity requirements relatively more challenging.
- Regulatory Challenges
 Legal and Regulatory Challenges in Islamic Finance
There are certain specific and unique challenges facing the Islamic finance industry. These
challenges include Shariah compliance and governance, and form versus substance in Islamic
financial transactions.
The IFSB (2014) report on the results of a Quantitative Impact Study (QIS) states, "Overall, the
QIS findings also highlighted a number of major problems for the IIFS, such as: insufficient
Sharī`ah-compliant High Quality Liquid Assets (HSLA) in the Islamic finance jurisdictions, and
lack of a deep and active secondary market for Sharī`ah-compliant HQLA for IIFS to manage
their liquidity.