Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Arguably given the stable characteristics of their deposit base, Islamic banks could afford to be more venturesome in their financing activities, despite the constraint of having to follow central bank directives, and the pressure to adhere to BIS capital adequacy requirements. Although some conventional bankers view the new Basel Capital Accords that will be implemented from 2004 with trepidation, the replacement of the 1988 Accord should allow Islamic banks greater flexibility, as there is a menu of approaches to risk management, rather than one size fits all, and a greater sensitivity to different types of risk.

Corporate lending at present carries a risk weight of 100 percent, but under the new Accord there will be four categories, 20, 50, 100 and 150 percent. The risk weights will be refined with reference to the external risk assessments by rating agencies. This could enhance the role of Capital Intelligence, the major ratings agency for Islamic banks and financial institutions in the Arab World and Pakistan, and the Malaysian Rating Corporation, a domestic agency. As the table shows, the Al Rajhi Banking and Investment Corporation and the Kuwait Finance have the most favourable long-term ratings for foreign exchange (FX), and the later enjoys the highest domestic strength. The Islamic banks in Bahrain, Jordan, Qatar and Saudi Arabia are assessed as having the greatest support from their central banks.

Table 1: Capital Intelligence Islamic Bank Ratings

	FX long	FX short	Domestic strength	Support
Al-Baraka Bahrain	BB+	A3	N/A	2
Al-Rajhi Saudi Arabia	BB+	A3	A-	3
Bahrain Islamic Bank	BB+	A3	BBB-	3
Bank Islam Malaysia	BB+	A3	BB+	2
Dubai Islamic Bank	BB+	A3	BBB-	2
Faysal Bank Pakistan	C	C	B-	2
Jordan Islamic Bank	BB-	B	BB	3
Kuwait Finance House	A-	A2	BBB+	2
Qatar International Islamic Bank	BB+	A3	BB+	3
Qatar Islamic Bank	BB+	A3	BB+	3
Shamil Bank (Bahrain)	BB+	A3	BB+	3

Compliance with BIS requirements and aspiring towards higher ratings are two aspects of the FSAP being developed by the IMF and World Bank. By the end of 2001 over one third of the 183 member states of the IMF were already involved in FSAP or volunteered to be included in the future. Already a number of Muslim countries, including Lebanon and Jordan, have been involved, while others, such as Yemen, have made formal commitments to participate. The IMF for its part tries to help participating countries to carry out assessments of financial sector vulnerabilities and developmental needs. It also encourages strengthening of the national institutional capacity to monitor financial activity and promote transparency and integrity in financial reporting. A code of good practice on transparency has been developed by the IMF in the expectation of it being implemented by all member states.

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Secretariat of the Basel Committee on Banking Supervision, The New Basel Capital Accord: An Explanatory Note, Bank for International Settlements, Basel, 2001.
Listings of these rankings are published each month in Islamic Banker, London.