Comparative study of Assessment of Capital Adequacy Ratio (CAR) for Islamic Banks in Pakistan under Basel II and IFSB formulae for Capital Adequacy (original) (raw)
Basel II Capital Adequacy framework for banks aims at building a solid foundation of prudent capital regulation, supervision, market discipline, along with enhancing risk management and financial stability. However, as per the views of some practitioners and scholars it does not appropriately address the concepts used in Islamic finance (IFSB and IRTI). Accordingly, Islamic Financial Services Board (IFSB) which is the international standard-setting organization of the Islamic financial industry, issued standards on Capital Adequacy as IFSB-2 in December 2005 and IFSB-7 in January 2009 which are largely based on the Basel approach, with necessary modification and adaptation to cater for specific nature and characteristics of Shariah compliant products and services. This research paper analyzes the implications of implementation of Basel-II Capital Adequacy Requirements and IFSB Standards to Islamic Banks, and recommends proposals for developing a Capital Adequacy framework that better account for their activities. The data frame for the study is the Islamic Banks of Pakistan. The comparison reveals that CARs worked out under IFSB Standard Formula are relatively higher than CARs under Basel-II of each bank. This industry needs relaxation under the supervisory discretionary formula as this is an emerging industry, growing at a rapid speed of YoY growth of 30% (SBP-2011), this will enhance its capacity to penetrate its branch network in all over the country; it will also help to get the economy of scale to better serve the people of Pakistan on the basis of equity, justice and transparency. The study will provide a foundation for further research in the field of determination of regulatory capital requirements and more prudent regulations for Islamic banks which will enhance the resilience of the industry and ensure soundness and stability of the overall economy.
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