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The IFSB’s 9th Public Lecture on Financial Policy and Stability focuses on Implementation of Regulatory Reforms and Sovereign Ṣukūk Issuance

Date posted: 12 April 2017

Kuala Lumpur, 12 April 2017The Islamic Financial Services Board (IFSB) successfully organised the 9th Public Lecture on Financial Policy and Stability, on 5 April 2017 in Kuala Lumpur, Malaysia. This Lecture series was held as part of the IFSB Annual Meetings and Side Events 2017, co-hosted by the Central Bank of the Islamic Republic of Iran and Bank Negara Malaysia.

The first speaker of the 9th Public Lecture was William Coen, Secretary-General of the Basel Committee on Banking Supervision, Bank of International Settlement who delivered an engaging lecture, themed, Global Adoption of the Basel Framework: Enhancing Financial Stability Across Countries.

In his lecture, Mr. Coen stressed the importance of strong global prudential standards to enhance the resilience of internationally active banks and the financial stability of the individual jurisdictions in which they operate. The absence of such standards or their inconsistent implementation would produce regulatory fragmentation and an uneven competitive playing field. Keeping this in mind, the Basel Committee introduced a comprehensive set of changes to global banking standards after the financial crisis, most notably through the Basel III framework. These post-crisis reforms set significantly higher requirements for loss absorption and place greater emphasis on higher-quality capital, while better capturing the full scope of risks that banks face.

Coen then explicated the Basel Committee’s implementation related work, which is being accomplished through the Regulatory Consistency Assessment Programme (RCAP), launched in 2012. This programme has three main objectives, firstly, it aims to monitor the timely adoption of the Basel standards by member jurisdictions through publishing reports regularly on the adoption status of the Basel standards by member jurisdictions and large banks. Secondly, it conducts peer review assessments on the completeness and consistency of the standards adopted by member jurisdictions, including significance of any deviations from the Basel framework. The assessment reports, which are available public, provide transparency on cross-jurisdictional differences and their significance in the local context. The programme also allows member jurisdictions to initiate corrective measures, to strengthen their regulatory regimes. Thirdly, it seeks to assess the outcomes of the application of these standards in ensuring the prudential ratios calculated by banks are consistent across the banking sector and member jurisdictions. This analysis extends the findings of the Committee's implementation monitoring and jurisdictional assessments – both of which focus on domestic rules and regulations – to implementation at the banking level.

He also discussed some of the initiatives undertaken by the Basel Committee to supplement the implementation efforts. For example, The RCAP assessments have uncovered various interpretative issues – around 45 in total – for the implementation of risk-based capital standards, Liquidity Coverage Ratio (LCR) and Global Systemically Importance Banks (G-SIB) rules. The Basel Committee periodically reviews such issues and publishes answers to such questions on how to interpret its standards. These “FAQs” support consistent implementation across member jurisdictions. Furthermore, the Basel Committee also conducts quantitative impact studies (QIS) on the effect of its standards and any proposed reforms in addition to issuing a large number of supporting guidelines, principles and sound practices for both banks and supervisors. While the scope of RCAP assessments does not cover all of the above, the adoption and implementation of these rules is an important complementary condition for achieving a resilient banking system.

William Coen concluded his lecture by emphasising that the full, timely and consistent implementation of the Basel standards is critical to improving and maintaining the resilience of the global banking system. This will therefore be one of the key themes of the Basel Committee’s work programme and strategic priorities.

The second speaker for the 9th Public Lecture was Dr. Mohd Daud Bakar, Founder and Group Chairman of Amanie Group, who delivered an enlightening lecture, titled, “Capital Raising for Sovereigns in an Era of Deficits: Realising Aspirations through Ṣukūk.

In his lecture, Dr. Mohd Daud Bakar shed light on some of the possibilities available to sovereigns to raise capital through the issuance of ṣukūk either for their working capital or for specific infrastructure projects. He highlighted that even though the pool of Islamic liquidity could be relatively smaller as compared to conventional liquidity pool, ṣukūk can still be an appealing alternative to both Islamic and conventional investors. A case in point is the ṣukūk issued by Emirates airlines in 2015 with the benefit of a guarantee by the export credits guarantee department of the UK government, which attracted interest from a diverse group of conventional and Islamic investors.

Dr. Bakar explained that the first and most important test for a sovereign is to secure the subscription, if not the over-subscription, of the ṣukūk issuance since sovereign cannot afford to take the risk of non-subscription. Furthermore, book building is not recommended for sovereign ṣukūk though some governments do organise road shows to ensure that the ṣukūk are issued on time. Highlighting the key benefit of sovereign ṣukūk issuance, he cited the creation of a yield curve, which would help the industry to progress further due to the availability of benchmarks in the market. Malaysia and Hong Kong are some jurisdictions which have taken this approach. Similarly, some governments are keen to issue ṣukūk in creating a strong profile for their Islamic finance initiatives. He, however, observed that persuading the corporates to issue ṣukūk remains a major challenge for policy makers. He reiterated that governments should play a leading role in supporting domestic ṣukūk markets and lead the way to enable the corporates to issue ṣukūk for their financing needs.

Dr. Bakar also shared with the audience a number of aspirations that could help improve the landscape of sovereign ṣukūk. His first aspiration focused on the need to increase the number of sovereign issuances for both treasury and external funding and the critical role which can be played by multilateral organisations such as the Islamic Development Bank and the Asian Development Bank in encouraging and urging more governments to issue sovereign ṣukūk. Furthermore, he called for the upscaling of the ṣukūk structures from plain vanilla into more innovative and award winning hybrid ṣukūk structures based on wakālah and murābaḥah that do not involve costly transfers of real assets. He also pointed out that governments familiar with the issuance of sovereign ṣukūk, could take the lead in encouraging other governments and big conglomerates to issue ṣukūk by providing technical assistance to support the issuance of sovereign ṣukūk in new markets. Finally, he referred to the possibility of governments securitising their assets through the issuance of sovereign ṣukūk.

Dr. Bakar then elaborated some of the challenges in the issuance of sovereign ṣukūk. Among these challenges are:

  1. lack of understanding and fear of complicated products, which emanates from the absence of sufficient information provided to the sovereigns on the benefits and advantages of ṣukūk and their impact on the budget and treasury of the country.
  2. the need to develop ṣukūk structures that will overcome any tax related issues.
  3. the need to manage public sentiments to avoid any negativity towards the transfer of sovereign assets for issuing ṣukūk.
  4. the indecisiveness of many governments in taking decisions on issuing ṣukūk is an impediment to the growth of the sovereign ṣukūk market.
  5. the lack of appreciation of diversification of sources of funding and the disagreements amongst the government agencies.
  6. issues over the premium to be paid over the benchmark pricing, for sovereigns issuing ṣukūk for the first time
  7. tenor of ṣukūk, whereby many governments prefer tenors of 20 to 30 years, while the longest tenor for ṣukūk is generally not more than 10 years.

He concluded his lecture by highlighting three recommendations to improve the number of issuances by sovereign entitles: Firstly, the establishment of a task force to examine the landscape of sovereign ṣukūk, secondly, the issuance of a guidebook on sovereign ṣukūk and finally the need for government-to-government dialogues on the issue of sovereign ṣukūk issuances.

The IFSB’s Annual Meetings and Side Events ended with the 30th IFSB Council Meeting, the 15th General Assembly and the 15th Islamic Financial Services Stability Forum on 6 April 2017.

For more information of these events, please visit www.ifsb.org.

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