Paper No. 49, Dec 2008

MAS Staff Paper No. 49, Dec 2008

RISKS AND REGULATON OF ISLAMIC BANKS: A PERSPECTIVE FROM A NON-ISLAMIC JURISDICTION

By Chia Der Jiun and Wang Yining


 

 

Abstract

Islamic finance is growing rapidly, with considerable growth of Islamic finance in regions beyond its historical boundaries and increasing cross-border Islamic financial activities. MAS has been reviewing its regulatory regime to facilitate the offering of Shariah-compliant or Islamic financial services in Singapore, so that these can be offered as part of a full suite of financial services available in our international financial centre. In this paper, we will share a perspective of the risks and regulation of Islamic banking from the point of view of a regulator in a non-Islamic jurisdiction. Although Shariah-compliant financing involves trading and holding tangible assets, or risk-sharing, Islamic banks are not necessarily more risky than conventional banks. This is because there is often extensive use of risk mitigation, which leaves the Islamic bank primarily exposed to the credit risk of the customers. In our view, Islamic banks are also not less risky than conventional banks, as even though PSIAs may render an Islamic bank more resilient against risks to its solvency standing, it is still exposed to all the categories of risk that a conventional commercial bank is subject to. The major significant unique risk that Islamic banks face is Shariah compliance risk. Singapore has chosen not to put in place a separate regulatory framework for Islamic banking. Our approach is to look through the form of the Islamic products and assess economic substance and risks involved, and use that assessment as the basis for regulation. This Islamic finance space is an evolving one, and MAS is committed to keeping our regulatory framework responsive and relevant to this fast-growing and ever-changing industry.

 

 

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Last Modified on 26/11/2016