Cross-Border Supervision of Islamic Banks Ahmad Jachi First Vice Governor Banque du Liban Washington DC June 10, 2006 Sixth Annual International Seminar on Policy Challenges for the financial sector

BANQUE DU LIBAN Islamic law or Sharia prohibits any payment of interest

BANQUE DU LIBAN Background Surge of Islamic self-identity and oil boom About 300 IFIs operating in 70 countries Over US$250 billion in assets Growth rate of 15% IFIs smaller in terms of assets and capital IFIs capture less than 10% of market share

ASSETS Loans Securities Current Accounts Interest bearing deposits LIABILITIES ASSETS Mark-up financing (Murabaha) Trust financing (Mudaraba) VC financing (Musharaka) Lease financing (Ijara) Sukuk Current Accounts PSIAs - unrestricted - restricted Sukuk LIABILITIES Commercial banks Islamic banks

BANQUE DU LIBAN Unregulated Islamic Banking Market Concentration and monopolization Conflict of interest Safety net exposure

BANQUE DU LIBAN Conflict of Interest Deny loans to affiliate’s competitors Tying loans to customers of the affiliate Making loans to failing affiliate Provide inexpensive funding to affiliates Disseminate valuable private information gathered in the course of its banking business to its affiliate

BANQUE DU LIBAN Safety Net Exposures Shifting losses of affiliate to bank Shifting affiliate’s riskiest assets to bank Subsidy

BANQUE DU LIBAN Other Exposures Shifting losses of bank to affiliate (PSIAs) Shifting affiliate’s profit to bank (PSIAs)

BANQUE DU LIBAN Financial Reporting No international standardization of rules and principles governing accounting practices of IBs Compliance w/ IAS does not guarantee full comparability between IFIs accounts Different accounting treatment of investment accounts renders the analysis even more difficult

BANQUE DU LIBAN Regulatory and Supervisory Framework Different standards, guidelines and laws are governing Islamic banking in different parts of the world Voluntary reserves to protect the capital of PSIA holders from losses Investment risk reserves Profit equalization reserves

BANQUE DU LIBAN HOME SUPERVISOR Islamic Bank Commercial Bank Islamic Bank HOST SUPERVISOR Islamic Bank Commercial Bank Cross-Border Supervisory Cooperation

Sound & stable financial system Importance of Cooperation between home and host supervisors Restricting banks to financial intermediation