Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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established the European Banking Association in 2014. OIC countries need to decide on a
model for coordinating the banking and macro risks.
The other challenge of the recent regulation practice is to adopt a different human resource
policy. Modern banking supervision has become not only very demanding but also more
complex and technical. Banking supervisors need to have a better understanding of macro and
financial risks simultaneously. This even requires changing the human resource policies of
banking supervisors. A better understanding of financial markets, systemic risk, and financial
stability require a different background for the new generation of supervisors.
Establishing a Financial Stability Board for Islamic countries can be beneficial for members.
Since the size of the economies and the banking sectors in Islamic countries differ widely, more
experienced countries can take leading roles in monitoring and managing systemic risks.
- Banking Regulation:
 Credit risk is the biggest risk faced by the selected OIC member countries we studied.
This was a general tendency for the other OIC countries too. OIC countries in general
reserved a significant amount of their capital against potential credit risk. In other
words, in these countries credit risk attains the highest weights in terms of required
capital adequacy. However, most of the OIC member states use standard credit risk
weights, which are not very risk-sensitive measures. The major deficiency of standard
risk weights is that these weights may understate the actual credit risks during economic
turbulence. One suggestion is to develop a systematic credit rating methodology
particularly designed for the OIC countries. Credit rating methodologies developed and
implemented in Europe and in the US may not be suitable for OIC countries because of
the informality and other peculiar aspects of these countries. Balance sheet and other
firm characteristics in these countries should be treated differently. Hence, creating a
local bad debt database would be a good starting point. Once the collection of the past
bad debt data is complete, international or local rating companies can process the data
to assess companies in the OIC countries. This is also in line with COMCEC's strategy
document published in 2012. In this strategy document, it is stated that "COMCEC will
help to improve the quality of regulation supervision and cooperation among regulatory
and supervisory bodies" After the recent changing regulatory environment, COMCEC's
vision and mission will become more critical.
 Coordination among OIC countries will be very beneficial. US or European rating
companies studying Islamic products might be credible but have data deficiency. One
example is the Turkish banking authority, which is initializing a national rating company
by using a large company’s default database. A coordination in local rating methodology
in OIC countries could be an important step to better supervise credit risk in OIC
countries.
 The need for credit rating methodology for Islamic banking products is another
important issue for OIC member states. Rating for Islamic financial products requires a
separate credit risk assessment institution. There are various companies in OIC member
states that undertake rating. For instance, Islamic International Rating Agency B.S.C.
(IIRA), which started its operations in 2005, is one of those companies. The importance
of rating for Islamic financial products is discussed by IFSB(2014) as follows: "The Sukuk
market needs appropriate rating agencies to be available in various jurisdictions to