© Copyright 2006 All Rights Reserved BASEL II I MPLEMENTATION AND I TS I MPACT ON I SLAMIC F INANCIAL I NSTITUTIONS St. Petersburg, Russia (June 2006) M ALAYSIA D EPOSIT I NSURANCE CORPORATION

G LOBAL I SLAMIC F INANCIAL I NSTITUTIONS

Islamic Financial Services Institutions Globally Assets of Islamic Banks and Islamic Window Islamic Sovereign and Corporate Sukuk (Securities) According to the International Monetary Fund, there are more than 300 Islamic financial services institutions established over 75 countries. Total gross assets over USD400 billion. Deposits estimated at over USD202 billion. Breached the USD15 billion mark. Malaysia Assets of Islamic banking industry growth at average of 18% p.a. while Takaful at 28% p.a.

C ONTRACTUAL R ELATIONSHIP  Varied Islamic Financial Institutions (IFI)-Customer relationship based on nature of contractual transactions  Liabilities Custodian of fund – accepting fund on Wadiah (safe custody) Entrepreneur – accepting fund on Mudharabah (profit sharing)  Assets Financier – in the form of Murabaha (cost plus), Istisna’ (order contract), Ijarah (leasing) and Salam (future delivery) Capital provider – in the form of Mudharabah (profit sharing) Partner – in the form of Musharaka (joint venture)

C ONTRACTUAL R ELATIONSHIP Islamic BankingConventional Banking Savings/Demand Deposits Relationship Financing Securities Others Co-ownership of assets100% owned by the bank ……IFI face different combination and magnitude of risks in each financial transactions engagement Sources of Fund Capital Custodian Investor-Manager Relationship Debtor-Creditor Investor-Manager Application of Fund Risk Fully transfer to customer Partially transfer to customer Fully borne by bank Risk Fully borne by bank Investment DepositsInvestor-Entrepreneur

O VERVIEW OF IFSB History Vision & Mission Members The Islamic Financial Services Board (IFSB), which is based in Kuala Lumpur, was officially inaugurated on 3rd November 2002 and started operations on March IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Islamic Shari'ah principles. There are 89 members of the IFSB including 21 regulatory & supervisory authorities as well as the International Monetary Fund, the World Bank, BIS, the Islamic Development Bank, the Asian Development Bank, and 62 financial institutions from 16 countries. Issuance of Standards In December 2005, two standards were issued i.e. the Guiding Principles of Risk Management and Capital Adequacy Standard for Institutions (other than Insurance Institutions) offering only Islamic Financial Services.

IFSB C APITAL A DEQUACY S TANDARD IFSB Capital Adequacy Standard (CAS) Objectives addressed the specific structure and contents of the Shari’ah compliant products and services offered by Islamic Financial Services (IFS); and standardize the approach in identifying and measuring risks in Shari’ah compliant products & services and in assigning risk weights (RW) in adopting and developing risk identification and measurement practices that meet internationally acceptable prudential standards. CAS covers minimum Capital Adequacy requirements based on the Standardised Approach in respect of Credit Risk and the Basic Indicator Approach for Operational Risks of the IFS, with respect to Pillar 1 of BASEL II. Implementation date is with effect from 2007.

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