Impacts of Basel III on Islamic Finance

Abstract

The Basel Committee on Banking Supervision (BCBS) has introduced Basel III which was initiated after the recent global financial crisis in an effort to strengthen the regulatory regime of the banking sector. Basel III has introduced several modifications such as added liquidity requirement ratios in addition to strengthening capital requirements. This paper examines the impact of Basel III regulatory framework on Islamic Finance from a theoretical point of view. Using content analysis, this study finds that the impact of Basel III on Islamic Finance is relatively smaller than conventional finance since their model does not support short selling and non-Shari'ah complaint derivatives and thus they are having this competitive advantage over their conventional counterpart. However, it is important to highlight that deep examination of Islamic Banks' nature, specifications, and the way they conduct business is required to identify issues not considered by the Basel III framework. As Islamic Banks will not be able to fully adopt Basel III framework without any modifications that are in line with their specifications and nature. Thus, recommending IFSB to adapt these new requirements and issue new standards by considering Islamic finance industry when doing so. There is also a need for a robust infrastructure for Islamic financial institutions for their sound liquidity and smooth functioning, which will include development of Islamic money market and securities market. In addition, there is need for innovating new Shari'ah compliant products for Islamic financial institutions instead of just mimicking conventional products.

The regulators’ dilemma and the global banking regulation: the case of the dual financial systems

“…The last literature review on the Islamic Banking industry reveals several contributions to performance analysis between Islamic and conventional banks [37]. Most contributions focus on (i) the last global financial downturn which affected differently Islamic and Conventional banking system [1,45], Farooq and Zaheer, 2015; [3,5,7,39], (ii) the Dual financial system-as a system where Islamic Finance operates alongside their Conventional counterparts- [2,16,33,45,55,57], iii) the impact of Basel III Standards on the banking system without considering the divergence in financial system architecture [4,18,19,28,35,29,40,75].…”

Impact of regulatory capital on bank interest margins: Moderating role of default risk

“…Basel III was issued by BCBS in November 2010, which had to apply in banking in 2015 [ 15 ], whereas in Bangladeshi banking, it applied in 2019 due to the late adaptation of Basel II. An overview of the implementation status can be found in Fig.…”