Consultation to be published in the first quarter of 2018, final set of rules in H2, says central bank official
Bahrain to launch compulsory risk regime for Islamic banks
Bahrain’s central bank is drawing up tight new requirements for Islamic banks to measure and report their exposure to financial risk, as part of the kingdom's efforts to standardise the industry and position the country as the Islamic banking capital of the Middle East.
The Central Bank of Bahrain (CBB) will publish a consultation on a proposed risk assessment framework for Islamic banks in the first quarter of 2018, and the final set of regulations in the second half of the year, Khalid Hamad Abdul-Rahman Hamad, executive director of banking supervision at CBB and chairman of the International Islamic Financial Market (IIFM), told The National in an interview.
“We would like to enhance the risk management aspect of Islamic finance,” Mr Hamad said. “We are planning to issue a very detailed risk management toolkit to improve risk management practices taken by Islamic banks – be it credit risk management, market risk management, operational risk management and profit rate risk in the banking book, which is equivalent to interest rate risk in conventional banking."
The regulations will require “banks to have proper reserves – be it profit equalisation reserves or investment risk reserves, and we would like these new rules to set proper standards [across] the banks in managing unrestricted investment accounts,” he added.
In Islamic banking, the holder of an unrestricted investment account authorises their bank to invest their funds in any manner the bank wishes. The mechanism works as an alternative to the deposit-led system in conventional banking.
Bahrain is seeking to grow its Islamic finance sector in the years ahead based on forecast 5 per cent annual growth rate in terms of Islamic banking assets over the next two years, CBB governor Rasheed Al Maraj told a conference in Bahrain on Tuesday.
A report published the same day by Thomson Reuters and the Islamic Corporation for the Development of the Private Sector (ICD) found that total Islamic finance assets are projected to reach US$3.8 trillion by 2022 on the back of enhanced regulations to strengthen the industry.
Bahrain is ahead of other countries regionally and internationally when it comes to the having the regulatory framework in place, said Mr Hamad. That includes being ahead of Indonesia, the most populous Muslim country, that has a sizable Islamic banking industry. The government-imposed standardisation is needed to increase transparency and grow the sector further, he added.
“We have given the market a lot of time to develop in this area and I think it’s the right time now to require the banks to have a proper methodology of allocating the funds,” Mr Hamad said.
“[Under the proposed new rules], whenever the bank is investing, they must have a pre-plan regarding how much of bank assets will be funded by unrestricted investment accounts, and how much will be invested from funds.”
Banks will be given time to adjust to the changes and implementation the new risk regulatory framework will be decided based on feedback from the consultation on banks’ readiness, Mr Hamad said.
In the conventional banking sector, Abu Dhabi’s financial free zone, Abu Dhabi Global Market (ADGM), published a consultation in October on proposed revisions to its banking risk rulebook, to bring the industry in line with global regulations such as Basel III.
Mr Hamad said the new Islamic risk requirements are part of Bahrain’s drive for overall compliance with Basel III, an international regulatory framework that sets capital standards for banks. The kingdom has already imposed capital adequacy and sharia governance rules in an effort to match Basel III.