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IRTI - Distance Learning 1 Financial Stability Dr Dadang Muljawan.

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Presentation on theme: "IRTI - Distance Learning 1 Financial Stability Dr Dadang Muljawan."— Presentation transcript:

1 IRTI - Distance Learning 1 Financial Stability Dr Dadang Muljawan

2 IRTI - Distance Learning 2 The basic concepts The basic concepts Contents of discussion Sources of funds Financing products Financing products Other services

3 IRTI - Distance Learning 3 B B Introduction 1

4 IRTI - Distance Learning 4 I. Introduction B B -Mobilize public funds -Optimize resource allocation process -Promote product innovation and flexibility -Promote fair competition in the Islamic financial industry -Facilitate the transactions of goods and services -Provide adequate customer protection -Promote good governance and risk management A sound and efficient Islamic financial system is capable to:

5 IRTI - Distance Learning 5 I. Introduction B B Stability and robustness Internal factorsExternal factors - Currency volatility - Price volatility - Fraud - Inefficiency - Illiquid market - No safety net - Panic - Imported inflation Sources of instability

6 IRTI - Distance Learning 6 I. Introduction B B Stable and robust Islamic financial system requires: -Strong institutions and markets -Efficient infrastructure -Supporting policies -Crisis management protocol

7 IRTI - Distance Learning 7 B B The pillars 2

8 IRTI - Distance Learning 8 II. The pillars B B Strong Islamic financial institutions and markets Islamic banking Zakat institution Takaful Micro finance Islamic pawn house Finance coy Capital Market and Money market Capital Market and Money market Competence, GCG and risk management, information system, market structure, supervision and customer protection

9 IRTI - Distance Learning 9 II. The pillars B B 1Improving level of competence -Develop standard for training to promote technical competence (in terms of financial and sharia aspects), integrity, and business ethics and sharia principles for the players as and supervisors. -Certification program for Islamic financial professionals -Regular review on the materials of the training and certification program. Strong Islamic financial institutions and markets

10 IRTI - Distance Learning 10 II. The pillars B B 2Good governance and risk management -The implementation of good governance principles for the Islamic financial institutions. -Standard guidance for governance, risk management and business continuity plan which adopts the international accounting standards and IFSB prudential standards. -Periodical review to adopt any developments including products and regulatory approach.

11 IRTI - Distance Learning 11 II. The pillars B B 3Information system -The information system should be capable in providing accurate and timely information covering Islamic financial subsectors whenever required. The development of the informational system is aimed at promoting efficiency and accuracy of the financial authority when making strategic decisions. This information exchange would also improve the capability of the system to conduct surveillance activities comprehensively.

12 IRTI - Distance Learning 12 II. The pillars B B 4Market structure -The capability of the Islamic financial institutions to play significant role in financial intermediation and risk management is also affected by the soundness, efficiency and liquidity of the market. The development process should be able to consolidate the development plan of each sector and focus on the financial deepening that maximizes the benefits of the financial system to the real economic development program.

13 IRTI - Distance Learning 13 II. The pillars B B 5Regulation and supervision -The development of the supervisory system should accomodate the need for cross-sectorial supervisory capability supported by appropriate system and man- power. -Information exchange program among financial authrities is very important, particularly as a foundation for establishing an early warning system that is capable of foreseeing potential disturbance to the financial system.

14 IRTI - Distance Learning 14 II. The pillars B B 6Customer protection -Customers and investor protection program is aimed at minimizing the vulnerability to any financial disturbance caused by unverifiable information or destructive rumors. -Transparency and financial performance are mutually reinforcing.

15 IRTI - Distance Learning 15 B B Infrastructure 3

16 IRTI - Distance Learning 16 III. Efficient infrastructure B B 1Deposit insurance -Deposit insurance plays a very fundamental role in maintaining public confidence high by providing a certain level of deposit repayment guarantee, particularly to the retail depositors, in the case of bank closure. -Public may not get well informed about the difference between underlying transactions applied in the deposit products and the investment products. -Operationally, the deposit insurance company should take part in the supervisory activities to ensure systemic stability.

17 IRTI - Distance Learning 17 B B 2Payment system -A reliable and efficient payment system plays an important role to support development in an Islamic financial market and, subsequently, the economic development by facilitating financial transactions among the economic players. -The sistem designed should be able to minimize risks resulted from the settlement process such as liquidity risk, credit risk, Herstatt risk and systemic risk. III. Efficient infrastructure

18 IRTI - Distance Learning 18 B B 3Fatwa resolution -fatwa resolution is very essential to maintain public confidence through providing legal certainty to the players. In some countries that operates Islamic financial institutions, fatwas have been compiled and standardized to improve efficiency. III. Efficient infrastructure

19 IRTI - Distance Learning 19 B B Supporting policies 4

20 IRTI - Distance Learning 20 IV. Supporting policies B B 1Monetary policy The monetary policy is made to provide clear signals to the market by using conventional as well as sharia compliant instruments. 2Fiscal policy The government can also participate in the development of Islamic finance by a regular issuance of Islamic government securities or sukuk locally and internationally.

21 IRTI - Distance Learning 21 B B Crisis management protocol Crisis management protocol 5

22 IRTI - Distance Learning 22 V. Crisis management protocol B B Financial policies should be set based on two possible condition: normal business and during the period of crisis. -The CMP serves as the anticipatory action to maintain the operational soundness of the financial system even if it operates under a significant financial pressure so that the intermediary function can always be performed. -The CPM should promote possible prompt corrective actions to stabilize the system whenever necessary.

23 IRTI - Distance Learning 23 B B Business continuity plan (BCP) – The financial authorities require the Islamic financial institutions to have business continuity plan to anticipate significant financial disturbance. The BCP should also be supported by qualified human resource and adequate information technology that allows the management to take right actions whenever necessary. Framework for coordination – Setting up a solid legal foundation for the coordination activities among the parties involved in the CMP decision making process. This includes procedures for decision making process, roles and responsibilities, flows of information and sets of possible prompt corrective actions to be taken during the crisis. V. Crisis management protocol

24 IRTI - Distance Learning 24 B B Early warning system – The information system that is capable to indicate financial turmoil is very essential in the implementation of CMP. Accurate information about the market allows the authority to define the critical period based on the thresholds set by the financial stability committee and decide the actions to be taken. Stress test – The financial authority may require the financial institutions and also themselves to conduct stress test. Proper stress test can improve mutual understanding among the market participants and regulator. It also allows them to regularly identify weak areas that need to be improved. V. Crisis management protocol

25 IRTI - Distance Learning 25 B B Solvency regime 6

26 IRTI - Distance Learning 26 B B VI. The solvency regime At product level Sharia contracts Expected residual value Types of claims Accounting standards Classification of financial products that are compliant to fatwas issued Accounting treatments leading to the sound financial practices Financial classification describing the types of claims and possesion of the assets The basis for further calculation like risk management

27 IRTI - Distance Learning 27 B B VI. The solvency regime Risk management Expected loss Objectives Micro: Operational sustainability Micro: Operational sustainability Macro: Minimizing potential systemic costs Macro: Minimizing potential systemic costs Deposit insurance Fiscal constraints Cost minimizing Exit policy Networth level At institution and macro level

28 IRTI - Distance Learning 28 B B VI. The solvency regime At institution and macro level where, C BO, C M and represent the potential of having a bail-out, the cost resulted from a bail-out process,a maintenance cost and discount rate respectedly. The first operator expresses the expected bail-out cost; whilst, the second operator expresses the present value of the expected menyatakan maintenance cost drawn from t to infinity. The supervisor selects the independent variables that are considered influencing the two possible events : (x 1,...x n-1,x n ). It is assumed that the operational sustainability of Bank A is higher than Bank B if A > B. The networth and optimal stopping time:

29 IRTI - Distance Learning 29 Read! In the Name of your Lord, Who has created (all that exists), Has created man from a clot. Read! And your Lord is the Most Generous, Who has taught (the writing) by the pen, Has taught man that which he knew not. B B Thank you for your kind attention and support

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