IFSB Paper Explores Inter-Sectoral Linkages in Islamic Finance
IFSB published, as part of its working paper series, a paper (WP-11) that explores the inter-sectoral linkages within the Islamic financial services industry and between the industry and the real sector via a financial network analysis. The results of WP-11 indicate a reduced likelihood of the Islamic banking sector creating a devastating effect on the financial network in the event that a systemic risk originated from it. Another IFSB-published working paper (WP-10) explores risk-sharing practices in the Islamic banking sector. WP-10 indicates that Islamic banks mostly comply with the disclosure requirements and, except in a few jurisdictions, engage in smoothing both of investment returns and of losses.
Paper on Inter-Sectoral Linkages—This working paper is intended to prepare ground for the future work of IFSB on developing macro-prudential guidelines. The paper extracted Islamic banking balance sheet data covering the fourth quarter of 2013 to fourth quarter of 2017 from the IFSB Prudential and Structural Islamic Financial Indicators database for generating a bilateral exposure adjacency matrix that indicates assets and liabilities across sectors of the the Islamic financial services industry and the real economy. The results obtained did not show the anticipated significant commonality across countries that would enable a strong (albeit descriptive) conclusion to be drawn. The results did, however, indicate what financial network analysis could be done if the requisite data were available. While some inexplicable results were noticed, in general, all seven sectors studied across the four selected jurisdictions have increased in inter-connectivity over time. Both the other financial institutions and household sectors recorded increased bilateral exposure in terms of obligations to other sectors. Notwithstanding, the results indicated a reduced likelihood of the Islamic banking sector creating a devastating effect on the financial network in the event that a systemic risk originated from it.
Paper on Risk-Sharing Practices—This working paper describes the views of both Islamic banks and regulatory and supervisory authorities on the practices of Islamic banks in the IFSB member jurisdictions. This is in relation to the governance rights of unrestricted profit-sharing investment account holder as well as the likely reasons that may account for a limited usage of equity-based contracts (such as muḍārabah and mushārakah), especially on the asset side of the balance sheet of Islamic banks. The study reveals that the capital treatment of the unrestricted profit-sharing investment account in general varies across different jurisdictions and Islamic banking type. In most of the jurisdictions unrestricted profit-sharing investment accounts are considered to be investments exposed to losses rather than deposits with capital certainty. Furthermore, the paper indicates that Islamic banks comply mostly with the disclosure requirements for the utilization of profit equalization reserve and/or investment risk reserve and consider the basis of allocation of profits between the Islamic banks’ shareholders and unrestricted profit-sharing investment account holders.
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Keywords: International, Banking, Insurance, Securities, Islamic Banking, Inter-Sectoral Linkages, WP-11, WP-10, Research, Risk Management, Systemic Risk, IFSI, IFSB
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