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BASELBASEL IIII IIMPLEMENTATION MPLEMENTATION

AND AND IITS TS IIMPACT ON MPACT ON IISLAMIC SLAMIC FFINANCIAL INANCIAL

IINSTITUTIONSNSTITUTIONSSt. Petersburg, St. Petersburg,

RussiaRussia(June 2006)(June 2006)

MMALAYSIA ALAYSIA DDEPOSIT EPOSIT IINSURANCE CORPORATIONNSURANCE CORPORATION

GGLOBAL LOBAL IISLAMIC SLAMIC FFINANCIAL INANCIAL IINSTITUTIONS NSTITUTIONS GGLOBAL LOBAL IISLAMIC SLAMIC FFINANCIAL INANCIAL IINSTITUTIONS NSTITUTIONS

GGLOBAL LOBAL IISLAMIC SLAMIC FFINANCIAL INANCIAL IINSTITUTIONS NSTITUTIONS GGLOBAL LOBAL IISLAMIC SLAMIC FFINANCIAL INANCIAL IINSTITUTIONS NSTITUTIONS

Islamic Financial Services

Institutions Globally

Assets of Islamic Banks and Islamic

Window

Islamic Sovereign and Corporate

Sukuk (Securities)

According to the International Monetary Fund, there are more than 300 Islamic financial services institutions established over 75 countries.

Total gross assets over USD400 billion.Deposits estimated at over USD202 billion.

Breached the USD15 billion mark.

Malaysia Assets of Islamic banking industry growth at average of 18% p.a. while Takaful at 28% p.a.

CCONTRACTUAL ONTRACTUAL RRELATIONSHIPELATIONSHIPCCONTRACTUAL ONTRACTUAL RRELATIONSHIPELATIONSHIP

Varied Islamic Financial Institutions (IFI)-Customer relationship based on nature of contractual transactions

Liabilities• Custodian of fund – accepting fund on Wadiah (safe

custody)• Entrepreneur – accepting fund on Mudharabah (profit

sharing)

Assets• Financier – in the form of Murabaha (cost plus), Istisna’

(order contract), Ijarah (leasing) and Salam (future delivery)

• Capital provider – in the form of Mudharabah (profit sharing)

• Partner – in the form of Musharaka (joint venture)

CCONTRACTUAL ONTRACTUAL RRELATIONSHIPELATIONSHIPCCONTRACTUAL ONTRACTUAL RRELATIONSHIPELATIONSHIP

Islamic Banking Conventional Banking

• Savings/Demand Deposits

Relationship

• Financing• Securities• Others

Co-ownership of assets 100% owned by the bank

……IFI face different combination and magnitude of risks in each financial transactions engagement

Sources of Fund

• Capital

• Custodian

• Investor-Manager

Relationship

• Debtor-Creditor

• Investor-Manager

Application of Fund

Risk• Fully transfer to customer• Partially transfer to customer• Fully borne by bank

Risk• Fully borne by bank

• Investment Deposits • Investor-Entrepreneur

OOVERVIEW OFVERVIEW OF IFSBIFSBOOVERVIEW OFVERVIEW OF IFSBIFSB

History

Vision & Mission

Members

The Islamic Financial Services Board (IFSB), which is based in Kuala Lumpur, was officially inaugurated on 3rd November 2002 and started operations on March 2003.

IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Islamic Shari'ah principles.

There are 89 members of the IFSB including 21 regulatory & supervisory authorities as well as the International Monetary Fund, the World Bank, BIS, the Islamic Development Bank, the Asian Development Bank, and 62 financial institutions from 16 countries.

Issuance of Standards

In December 2005, two standards were issued i.e. the Guiding Principles of Risk Management and Capital Adequacy Standard for Institutions (other than Insurance Institutions) offering only Islamic Financial Services.

IFSB CIFSB CAPITAL APITAL AADEQUACY DEQUACY SSTANDARD TANDARD IFSB CIFSB CAPITAL APITAL AADEQUACY DEQUACY SSTANDARD TANDARD

IFSB Capital Adequacy

Standard (CAS) Objectives

addressed the specific structure and contents of the Shari’ah compliant products and services offered by Islamic Financial Services (IFS); and

standardize the approach in identifying and measuring risks in Shari’ah compliant products & services and in assigning risk weights (RW) in adopting and developing risk identification and measurement practices that meet internationally acceptable prudential standards.

CAS covers minimum Capital Adequacy requirements based on the Standardised Approach in respect of Credit Risk and the Basic Indicator Approach for Operational Risks of the IFS, with respect to Pillar 1 of BASEL II. Implementation date is with effect from 2007.

Thank you …