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    IFSB Report Assesses Stability of Islamic Financial Services Sector

    August 18, 2021

    The Islamic Financial Services Board (IFSB) issued the ninth edition of the financial stability report on the Islamic financial services sector. The report provides updates on the key trends and growth outlook and examines the resilience of the Islamic financial services industry against the COVID-19 shock, along with other vulnerability factors across the Islamic banking, capital markets, and insurance segments. The report also tracks initiatives of other international financial standard-setting bodies, with an emphasis on aspects that relate to the complementary role played by IFSB. Various IFSB initiatives have been highlighted, including a synopsis of the IFSB Standards Implementation Survey and standards development.

    The financial stability report includes box-article contributions from some IFSB members such as the Central Bank of Bahrain, the Central Bank of the UAE, the Saudi Central Bank, and the State Bank of Pakistan. Other contributors are the Insurance and Private Pensions Regulation and Supervision Agency of Turkey, International Islamic Liquidity Management, and Moody's Investors Services. The article from Moody’s Investors Services summarizes the agency's views on the recent developments in Islamic Finance across the markets that Moody's covers. The article highlights that Islamic banks' financing asset growth will be moderate but still outpace conventional counterparts in 2021. To analyze the Islamic banking sector, the report utilizes data from the Prudential and Structural Islamic Financial Indicator (PSIFI) database of IFSB. The key highlights of the assessment include the following:

    • The Islamic banking segment retained its dominance in the global Islamic financial services industry. The domestic market share for Islamic banking in relation to the total banking segment continued to increase in at least 23 countries, among the 36 jurisdictions covered in the report.
    • The liquidity position of the Islamic banking sector in many jurisdictions tightened in the first quarter of 2020 due to the dual shock of COVID-19 and falling oil prices and production. The Islamic banking sector in most jurisdictions lacks Sharīʻah-compliant avenues for liquidity management and is prone to liquidity risk arising from the maturity transformation of converting short-term funding to long-term investments. Nonetheless, both the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) as measures of both short-term and medium to long-term liquidity resilience are above the 100% threshold for all but one jurisdiction, namely Bangladesh.
    • The Islamic banking industry entered the COVID19-induced crises with stable capital adequacy ratios that were well above the IFSB's and its respective jurisdictions' regulatory thresholds. The average total and average Tier-1 capital adequacy ratios of the global Islamic banking industry as at the end of third quarter of 2020 were 18.3% and 16.1%, respectively. The various policy measures put in place across jurisdictions have helped to ensure that the regulatory capital ratios do not decline below the regulatory minimum on account of the outbreak of the COVID-19 pandemic.
    • The regulatory leverage ratio was reported by eight PSIFIs-contributing jurisdictions, all of which have exceeded the 3% requirement.
    • The Islamic banking segment’s performance grew by 4.3% in 2020, compared to 12.4% in 2019. As at third quarter of 2020, the Islamic banking segment accounts for 68.2% (72.4% in 2019) of the total value of Islamic financial services industry assets, the declining share being mainly due to increased prominence of the Islamic capital market segment.

    With respect to the development of regulatory standards, the report notes that IFSB has nine standards, technical notes, and guidance notes under development. Those within the Islamic banking workstream include technical note on resolution and recovery plan for institutions offering Islamic financial services, technical note on Sharīʻah-compliant liquidity management tools, and guiding principles on corporate governance for institutions offering Islamic financial services. 


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    Keywords: International, Banking, Insurance, Securities, COVID-19, Financial Stability Report, Islamic Banking, Basel, Liquidity Risk, Regulatory Capital, IFSB

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