العدد الحالي: ايلول/ سبتمبر 2018       اختر عدد :
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كلمة المجلس العام

Abdelilah BELATIK

Secretary General of CIBAFI

Welcome to the 51st edition of the Global Islamic Economics Magazine (GIEM). As always, it is our pleasure to keep you updated with the recent developments, current challenges and opportunities for the global Islamic finance industry. The GIEM also serves as the platform for CIBAFI to keep its stakeholders abreast of its activities and initiatives, and inform about important areas of development impacting the Islamic banking and finance industry.

 

With increasing prominence of Islamic banks in and outside of the Islamic world, this month CIBAFI would like to highlight the importance of stress testing in maintaining stability of Islamic financial institutions (IFIs) and the overall financial system.

In the aftermath of the Global Financial Crisis, the banking and financial regulators have started implementing stringent and close controls over their financial institutions. The global regulatory bodies felt a strong need for the banks to undertake regular checks for their resilience and their ability to withstand adverse economic situations. Basel III regulation has also stressed on liquidity stress testing of the banking institutions to be carried out at regular intervals. With revised global regulations, especially after the financial crises, many jurisdictions use stress testing as an important tool to test the strength of their institution/s under hypothetical adverse economic scenarios. Islamic financial stakeholders also devise strategies to partake in stress testing as one of the major exercises to take stock of their financial strength and their capacity to withstand any future crisis.

Stress tests are considered important both from micro and macro prudential perspectives. For instance, these tests can be designed for particular financial institutions to test if they hold enough capital and determine their risk exposures (micro perspective), and also to measure specific risks that are important to the banking system on the whole (macro perspective). Since Islamic financial institutions are characterised by specific risks (such as Shariah non-compliance risk) and different nature of other risks such as credit, market or liquidity risks, it is important that the governance framework for stress testing for Islamic financial institutions be carefully tailored to measure and assess their respective risks. Stress testing may involve IFIs to run a simulation of how they would cope under various distressing conditions, such as abrupt rise in profit rates or unemployment, big crash in equity markets, steep drop in oil prices, etc.

In order to have an effective stress-testing, the governance framework for stress testing should constitute clear objective/s, selection of appropriate stress scenarios, and a strategy to interpret test results into meaningful and actionable terms. If the required data is unavailable or is insufficient, Islamic banks and the regulator may explore appropriate data proxies for the purpose of stress testing.

From the regulators’ perspective developing stress-testing capacity for IFIs is a crucial exercise under the governance of stress tests. This would require suitable capacity building and enhancing the ability to test IFIs’ risks under stress. As Islamic financial instruments do not match precisely with those of conventional counterparts in their credit, market and operational risk profiles, there will be a need to assign closest match and tweak the test to the objectives of the stress test, and supplementing it with additional tools for financial stability analysis for IFIs. There may be numerous models for the stress tests which can be used by IFIs and the supervisors. These models may further be developed for a variety of reasons, depending on the jurisdiction’s macro and micro economic situations and other factors, and may be carried out across difference levels, such as at a portfolio level, institutional level or system-wide level.

The Islamic Financial Services Board (IFSB) which issued IFSB-13 on guiding principles on stress testing for IFIs in March 2012 has recently issued an Exposure Draft of a Technical Note to update and enhance stress testing practices among the IFIs. The Technical Note, which is expected to be issued in the coming months, will provide technical guidance on how to conduct the stress tests in practice. This technical note among others includes the design and simulation of solvency and liquidity stress tests for IFIs, with the risk specificities of Shariah compliant contracts, stress test templates, running scenarios of various assumptions and stress parameters.

Stakeholders of Islamic financial industry can take advantage from other jurisdictions such as European Union wherein the European Banking Authority (EBA) conducted and published in July 2016 EU-wide stress test of 51 banks from 15 countries covering around 70% of banking assets in each jurisdiction. This was done with an objective to provide supervisors, banks and other market participants with a common analytical framework to reliably compare and evaluate the stability of large EU banks to adverse economic situations. In these times of uncertain and volatile economic conditions, Islamic banks are encouraged to have regular rounds of stress testing simulations to assess their resilience and capacity to stand to economic shocks and changing market climate.

CIBAFI as an umbrella of Islamic financial institutions continues to monitor the financial industry with a view to bring synergy among various stakeholders of the industry, address areas of challenges and identify opportunities in developing Islamic finance globally through its four Strategic Objectives. Stay tuned!