Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Even the Islamic Development Bank (IDB) has increased its subscribed capital to meet the requirements of the BIS and to ensure favourable ratings. In 2001 the subscribed capital was almost doubled to eight billion Islamic dinar. As a result its long-term rating became A-, which meant it had more favourable access to co-financing in international markets than might otherwise have been the case. Most Islamic commercial banks have more than adequate capital asset ratios according to BIS criteria, the Jordan Islamic Bank ratio for 2000 being almost 16 percent for example, while that for the Bahrain based Al Baraka Islamic Bank was 25 percent. Changes in the value of shareholder equity in these quoted banks depends on stock market developments, but despite the volatility of the 1999-2002 period and depressed stock prices, the BIS minimum has been exceeded.

Arguably because investment deposits with Islamic banks are not guaranteed, they have to be treated differently from conventional bank liabilities, necessitating less capital cover. The Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) takes this more favourable position into account when calculating capital adequacy ratios, with that for the Jordan Islamic Bank calculated at over 35 percent, more than double the ratio using conventional BIS methods of calculation. A dialogue between AAOIFI and the BIS could be helpful for the Islamic banking industry, with perhaps some of the major global accounting firms participating, especially their partners with responsibility for the auditing of Islamic banks. Useful lessons could perhaps be drawn from the experience of the Central Bank of Malaysia (Bank Negara Malaysia) which has developed a Risk Weighted Capital Ratio (RWCR) and a Rate of Return (ROR) framework for the regulation of the Islamic banking industry.

It is clear that Malaysia with its outward looking stance and its innovative interpretation of shariah laws on finance is destined to play a growing role in Islamic banking globally, and can to some extent intermediate between the Islamic finance industry and international financial institutions, notably the IMF. Kuala Lumpur is the location for the headquarters of the Islamic International Services Board (IFSB) which was established on 3rd November 2002 following an earlier meeting at the IMF in Washington attended by the governors of the central banks of a number of Muslim countries, including Iran, Kuwait, Pakistan, Saudi Arabia, Sudan and the UAE, and representatives of the IDB, together with Professor Rifaat Karim representing AAOIFI. This Washington meeting had been preceded by a conference in February 2000 organised jointly by the IMF, the IDB and AAOIFI, and a session at the Annual Meeting of the IMF and World Bank in September 2000 in Prague attended by the governors of central banks from several Muslim countries.

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Haizhou Huang and S. Kal Wajid, “Financial stability in the world of global finance”, Finance and Development, vol. 39, no. 1, pp. 13-16.
Mushtak Parker, “IDB ups capital in muted Algiers meet”, Islamic Banker, issue 70 and 71, November – December 2001, pp. 20-21.
Mushtak Parker, “IDB ups capital in muted Algiers meet”, Islamic Banker, November-December 2001, pp. 20-21. The Islamic dinar is on parity with the IMF Special Drawing Right, and ID 8 billion is worth approximately $10 billion.
New Horizon, March 2002, pp. 14-15.
Tan Sri Dato’ Dr Zeti Akhtar Aziz, “Economic and monetary developments in Malaysia for 2001”, BIS Review, 21/2002, op. cit., p. 2.