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BASLE FRAMEWORK AND THE ISSUES OF REGULATION, SUPERVISION AND CORPORATE GOVERNANCE IN ISLAMIC BANKING DR. M. UMER CHAPRA RESEARCH ADVISER IRTI/IDB, JEDDAH.

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Presentation on theme: "BASLE FRAMEWORK AND THE ISSUES OF REGULATION, SUPERVISION AND CORPORATE GOVERNANCE IN ISLAMIC BANKING DR. M. UMER CHAPRA RESEARCH ADVISER IRTI/IDB, JEDDAH."— Presentation transcript:

1 BASLE FRAMEWORK AND THE ISSUES OF REGULATION, SUPERVISION AND CORPORATE GOVERNANCE IN ISLAMIC BANKING DR. M. UMER CHAPRA RESEARCH ADVISER IRTI/IDB, JEDDAH

2 2 THE NEED FOR INTERNATIONAL FINANCIAL REFORM INTERNATIONAL FINANCIAL CRISES HOW TO PREVENT SUCH CRISES FROM TAKING PLACE IN THE FUTURE? CALL FOR A “NEW ARCHITECTURE” FOR THE FINANCIAL SYSTEM BASLE COMMITTEE ON BANKING SUPERVISION (BCBS)

3 3 THE 1988 BASLE CAPITAL ACCORD BCBS, INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS (1988)  A SIMPLE STANDARDIZED APPROACH FOR ESTABLISHING MINIMUM CAPITAL REQUIREMENTS – BANKS TO MAINTAIN CAPITAL ON THE BASIS OF FIVE CLASSES OF BORROWERS (0%, 10%, 20%, 50% AND 100%)  DID NOT DISTINGUISH BETWEEN THE RELATIVE DEGREES OF CREDITWORTHINESS AMONG INDIVIDUAL BORROWERS  APPLIED INITIALLY TO INTERNATIONALLY ACTIVE BANKS IN THE G10 COUNTRIES

4 4 BASLE II GREATER FOCUS ON RISK MEASUREMENT AND CONTROL THE “THREE PILLARS”

5 5 BASLE II (1) “ PILLAR 1”: CAPITAL ADEQUACY  RISK ADJUSTED CAPITAL REQUIREMENTS  THREE OPTIONS  EXTERNAL-RATINGS BASED  INTERNAL-RATINGS BASED  MODELS-BASED

6 6 BASLE II (2) “PILLAR 2”: SUPERVISORY REVIEW  TO EVALUATE THE RISK PROFILES OF INDIVIDUAL BANKS  SPECIFY THE NEED FOR REMEDIAL MEASURES

7 7 BASLE II (3) “PILLAR 3”: MARKET DISCIPLINE  ENHANCING THE DEGREE OF TRANSPARENCY IN BANKS’ PUBLIC REPORTING AND THE DISCLOSURES THEY MUST MAKE TO LEND GREATER INSIGHT INTO THE ADEQUACY OF THEIR CAPITALIZATION

8 8 THE CORE PRINCIPLES (1997)  BCBS, CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION (1997)  SETS OUT 25 BASIC PRINCIPLES THAT ARE REQUIRED FOR AN EFFECTIVE SUPERVISORY SYSTEM

9 9 THE CORE PRINCIPLES (1)  PRINCIPLES 1-5 : LICENSING AND STRUCTURE  PRINCIPLES 6-15: PRUDENTIAL REGULATIONS AND REQUIREMENTS  PRINCIPLES 16-20: METHODS OF ONGOING BANKING SUPERVISION

10 10 THE CORE PRINCIPLES (2)  PRINCIPLE 21: INFORMATION REQUIREMENTS  PRINCIPLE 22: FORMAL POWERS OF SUPERVISION  PRINCIPLES 23-25: CROSS-BORDER BANKING

11 11 REGULATION AND SUPERVISION OF ISLAMIC FINANCIAL INSTITUTIONS (1) TWO RESPONSIBILITIES :  TO APPLY THE INTERNATIONAL STANDARDS  TO COMPLY WITH THE SHARI‘AH

12 12 ISSUES INVOLVED (1)  CAPITAL ADEQUACY  EVALUATION AND CONTROL OF RISKS IN THE DIFFERENT ISLAMIC MODES OF FINANCE: CREDIT RISK, MARKET RISK, LIQUIDITY RISK, INTEREST RATE RISK AND OPERATIONAL RISK MUDARABAH, MUSHARAKAH, MURABAHAH, SALAM, IJARAH, AND ISTISNA ‘

13 13 ISSUES INVOLVED (2)  ACCOUNTING STANDARDS  INTERNAL CONTROLS AND EXTERNAL AUDIT  GREATER TRANSPARENCY  DEPOSIT INSURANCE  SHARI‘AH AUDIT

14 14 CORPORATE GOVERNANCE WHAT IS CORPORATE GOVERNANCE?  PROTECT THE INTERESTS OF ALL STAKEHOLDERS BY ENSURING FAIRNESS, TRANSPARENCY AND ACCOUNTABILITY  WHY CORPORATE GOVERNANCE? PRINCIPAL/AGENT CONFLICT OF INTERESTS

15 15 DIFFERENT MODELS OF CORPORATE GOVERNANCE  ANGLO-AMERICAN MODEL  FRANCO-GERMAN MODEL  THE ISLAMIC MODEL: THE CONCEPT OF JUSTICE IN ISLAM

16 16 MECHANISMS FOR CORPORATE GOVERNANCE BOARD OF DIRECTORS SENIOR MANAGEMENT SHAREHOLDERSDEPOSITORS

17 17 TOOLS FOR CORPORATE GOVERNANCE INTERNAL CONTROLS SYSTEM RISK MANAGEMENT CULTURE  CREDIT RISK, MARKET RISK, LIQUIDITY RISK, INTEREST RATE RISK AND OPERATIONAL RISK ENHANCING TRANSPARENCY LOAN ACCOUNTING AND DISCLOSURE EXTERNAL AUDIT SHARI‘AH CLEARANCE AND SHARI‘AH AUDIT

18 18 THE NEED FOR INSTITUTIONAL INFRASTRUCTURE FACTORS THAT ENABLED THE ISLAMIC SYSTEM TO WORK EFFECTIVELY IN THE CLASSICAL PERIOD CAN WE MAKE THE SYSTEM SUCCESSFUL NOW? THE NEED FOR INSTITUTIONAL INFRASTRUCTURE

19 19 INSTITUTIONAL INFRASTRUCTURE (1) CREDIT RATING AGENCIES CENTRALIZED SHARI‘AH BOARD CHARTERED SHARI‘AH AUDITORS SHARI‘AH COURTS AND BANKING TRIBUNALS

20 20 INSTITUTIONAL INFRASTRUCTURE (2) AUDIT ORGANIZATION ISLAMIC FINANCIAL MARKET LENDER OF LAST RESORT TRAINING INSTITUTES FOR ISLAMIC BANKING

21 21 CONCLUSION


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