Islamic Banking & Finance Page 13-09-2019

Posted on September 12, 2019
Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

What are important for Prudential and Structural Islamic Indicators and how they need to be maintained and monitored internationally by IMF and IFSB and country wise by their Central Banks

 

First of all a  credible, consistent and accurate database for Islamic finance is important for the purpose of micro- and macro-prudential oversight of the Islamic financial services industry (IFSI).

The underlying purpose of the Prudential and Structural Islamic Financial Indicators (PSIFIs) project is to facilitate macro prudential analysis and to help assess the structure and state of development of the IFSI. While macro prudential analysis deals with the macroeconomic and institutional determinants of the soundness of the financial system, the analysis of the structure and development of the IFSI should help gauge its contribution to economic growth and the overall development of the financial sector.

With these two purposes in mind, there are five key objectives of the PSIFIs project

  1. to facilitate the monitoring and analysis of the soundness and stability of the IFSI through a set of prudential, structural and financial strength indicators, as well as by fostering cooperation among central banks/monetary authorities and other relevant supervisory authorities;
  2. to support and help coordinate the formulation, development and enhancement of appropriate international prudential standards by the IFSB;
  3. to help promote the development of the IFSI as a vehicle for stimulating economic development and reducing disparities in economic progress between nations;
  4. to help strengthen transparency and international comparability of domestic IFSI in order to facilitate their integration into the international financial system through public accessibility to the PSIFIs and other published cross-country industry data in IFSB research reports; and
  5. to help ascertain the market shares of Shari`ah-compliant financial transactions, products and services as a percentage of the entire financial system, at both the national and global levels, so as to gauge the performance of the IFSI at any given time.

The aggregated data are compiled by the banking regulatory and supervisory authorities (RSAs) for Islamic banks in different jurisdictions. Data are separately compiled for prudential and structural indicators for stand-alone Islamic banks and Islamic windows of conventional banks.

Data of member countries are prepared on a quarterly basis where possible. However, member countries have the flexibility to submit their data will lesser frequency, depending upon its availability in respective jurisdictions.

Since the project includes two types of indicators, called Prudential Islamic Financial Indicators and Structural Islamic Financial Indicators hence, Prudential Islamic Financial Indicators are further divided into Core and Additional Indicators. A brief description of these indicators is provided below:

  1. “Core Prudential Islamic Financial Indicators” are the key indicators that are believed to best capture the strengths and vulnerabilities of the sector. The indicators are grouped into six categories: capital adequacy, asset quality, earnings, leverage, liquidity, and sensitivity to risks.
  2. “Additional Prudential Islamic Financial Indicators” are recommended when they are relevant to a country and are feasible to collect. These indicators collect additional information on: a) income distributed to investment account holders (IAH) out of total income from assets funded by profit-sharing investment accounts (PSIA), b) total off-balance-sheet items to total assets, c) foreign-currency denominated funding to total funding, d) foreign-currency denominated financing to total financing, e) value of Sukūk holdings to total capital, f) value (or percentage) of Sharī`ah-compliant financing by economic activity, g) value (or percentage) of gross NPF by economic activity, and h) value (or percentage) of Returns by major type of Sharī`ah-compliant contracts.
  3. “Structural Islamic Financial Indicators” are indications of the size and structure of the Islamic banking sector. The indicators include a) number of Islamic banks/windows, b) number of employees, c) total assets, d) total funding/liabilities, e) total revenues, f) earnings before taxes and Zakat, and e) value (percentage) of financing by major type of Sharī`ah-compliant contracts.

The Prudential and Structural Islamic Financial Indicators (PSIFIs) have been created as a parallel system to the IMF Financial Soundness Indicators (FSIs) with appropriate adaptions for Islamic finance. Following the Asian Financial Crisis in the mid-1990s, the IMF began developing a set of indicators of the soundness of financial systems, called Financial Soundness Indicators, or FSIs. These indicators were intended to measure the strengths or vulnerabilities of financial systems as a whole as opposed to looking at the condition of individual banks. Two sets of FSIs were developed after an extensive period of consultation and development. A set of so called “core indicators” was created that captured the most important measures of financial strength of the banking sector – the IMF urged all countries to compile the core set. A second set of “encouraged indicators” that also captures important information, but might not apply in all countries or might be difficult to compile was also developed – countries were encouraged to compile these indicators whenever relevant and feasible.

The IFSB now seeks to compile a parallel set of indicators – Prudential and Structural Islamic Financial Indicators (PSIFIs) – to facilitate the monitoring and analysis of the soundness and stability of the IFSI in member countries while capturing information on the unique characteristics of Islamic finance. The IFSB reviewed the FSIs and developed its own indicators, drafted a Compilation Guide in 2007 that defined the methodology to compile the indicators, and carried out a pilot project with four countries. Later, the IFSB issued its Revised Compilation Guide in 2011 to incorporate the Basel II developments and corresponding IFSB standards.

During the Global Financial Crisis (GFC), the G20 countries conducted a review of statistical gaps that contributed to the crisis – one of the top recommendations called for increased compilation of FSIs and a review and expansion of the indicators. The review updated the FSIs to reflect the strengthening of the Basel supervisory regime and to provide expanded coverage of nonbank financial subsectors such as insurance. In 2013, the IMF released “Modifications to the current list of FSIs” that brought in new Basel-related indicators, changed some existing indicators, and increased coverage of nonbank institutions.

In 2014, the IFSB started the new phase of this program to start the collection and dissemination of the data from a wider set of member countries on a regular basis. Accordingly, after the approval of the IFSB Council in March 2014, a Task Force on PSIFIs was established that comprises at least two country compilers from each participating jurisdiction, including multilateral institutions such as the IMF and Islamic Development Bank. The major components of the new phase are:

  1. prepare an updated list of indicators, incorporating new IFSB standards, global regulatory developments such as Basel III framework and current supervisory best practices at the global level;
  2. collect accurate, reliable and up-to-date indicators on the soundness and structure of the industry from the member jurisdictions on a regular basis;
  3. compile corresponding ‘metadata’ that describe the methodology and procedures used in each country to compile the indicators; and
  4. Set up a secure, online system to receive data from participating jurisdictions and disseminate it to the stakeholders on the IFSB website.

The program also includes a ‘capacity building’ component that aims at organizing workshops for the country compilers to provide an insight into the methodology and compilation practices of PSIFIs. These workshops also facilitate a consistent understanding of the programs data requirements and compilation procedures as well as help the participating countries improve their data collection and dissemination platforms for Islamic banking industry.

The Task Force on PSIFIs has also updated the list of indicators included in the supplement to the IFSB Revised Compilation Guide 2011 after thorough deliberations to incorporate newly issued IFSB standards and global regulatory developments. In preparation for regular compilation of PSIFIs, a Coordinated Compilation Exercise (CCE) is undertaken in each cycle, in which each country compiles a set of indicators for the same time period(s) so that the data can be compared and analyzed for consistency and reliability. The CCE permits countries and the IFSB Secretariat to test their procedures, evaluate results, and update data collection and dissemination methodologies, where needed.

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