The revised capital requirements for Basel III by the Islamic Financial Services Board (IFSB) will help boost the Islamic finance industry, according to Standard & Poor’s report.
“In our opinion, the introduction of a liquidity coverage ratio might address some of the industry’s long-standing weaknesses, particularly the lack of high quality liquid assets (HQLA),” the report said.
Standard & Poor’s credit analyst Mohamed Damak said the agency’s base-case scenario assumes that there will be no major changes in Islamic banks’ quality of capital, which it sees as strong on average.
“At the same time, we believe that raising capital requirements through the introduction of new capital buffers will help to make the industry more resilient,” he explained.
Damak indicated that while S&P continues to view the liquidity of the Islamic financial institutions that it rates as adequate on average, the agency thinks that Basel III implementation creates an opportunity for the industry to develop a new range of HQLA to address the chronic lack of such instruments.
The implementation of Basel III will also test the treatment of profit sharing investment accounts (PSIAs) from liquidity and funding perspective. PSIA holders are, in theory, obliged to share any losses, but this could increase their volatility and liquidity coverage requirements and reduce their role as stable funding sources.