1
Financial Stability
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The basic concepts The basic
concepts
Contents of discussion
Sources of funds Sources of
funds
Financing products Financing
products
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B
Introduction
Introduction
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I. Introduction
B
- Mobilize public funds
- Optimize resource allocation process
- Promote product innovation and flexibility
- Promote fair competition in the Islamic financial industry - Facilitate the transactions of goods and services
- Provide adequate customer protection
- Promote good governance and risk management
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I. Introduction
B
Stability and robustness
Internal factors External factors
- Currency volatility - Price volatility - Fraud
- Inefficiency - Illiquid market - No safety net - Panic
- Imported inflation
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I. Introduction
B
Stable and robust Islamic fnancial system
requires:
- Strong institutions and markets
- Efcient inarastructure
- Supporting policies
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B
The pillars
The pillars
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II. The pillars
B
Strong Islamic
fnancial
institutions and
markets
Competence, GCG and risk
management, information system, market structure, supervision and
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II. The pillars
B
1 Improving level of competence- Develop standard aor training to promote
technical competence (in terms oa fnancial and sharia aspects), integrity, and business ethics and sharia principles aor the players as and supervisors.
- Certifcation program aor Islamic fnancial proaessionals
- Regular review on the materials oa the training and certifcation program.
Strong Islamic
fnancial
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II. The pillars
B
2 Good governance and risk management
- The implementation oa good governance
principles aor the Islamic fnancial institutions. - Standard guidance aor governance, risk
management and business continuity plan which adopts the international accounting standards and IFSB prudential standards. - Periodical review to adopt any developments
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II. The pillars
B
3 Information system
- The inaormation system should be capable in providing accurate and timely inaormation
covering Islamic fnancial subsectors whenever required. The development oa the inaormational system is aimed at promoting efciency and
accuracy oa the fnancial authority when making strategic decisions. This inaormation exchange would also improve the capability oa the system to conduct surveillance activities
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II. The pillars
B
4 Market structure
- The capability oa the Islamic fnancial institutions to play signifcant role in fnancial
intermediation and risk management is also affected by the soundness, efciency and liquidity oa the market. The development process should be able to consolidate the
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II. The pillars
B
5 Regulation and supervision
- The development oa the supervisory system
should accomodate the need aor cross-sectorial supervisory capability supported by appropriate system and man-power.
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II. The pillars
B
6 Customer protection
- Customers and investor protection program is aimed at minimizing the vulnerability to any fnancial disturbance caused by unverifable inaormation or destructive rumors.
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B
Infrastructure
Infrastructure
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III. Efcient infrastructure
B
1 Deposit insurance
- Deposit insurance plays a very aundamental role in maintaining public confdence high by
providing a certain level oa deposit repayment guarantee, particularly to the retail depositors, in the case oa bank closure.
- Public may not get well inaormed about the difference between underlying transactions applied in the deposit products and the
investment products.
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B
2 Payment system
- A reliable and efcient payment system plays an important role to support development in an
Islamic fnancial market and, subsequently, the economic development by aacilitating fnancial transactions among the economic players.
- The sistem designed should be able to minimize risks resulted arom the settlement process such as liquidity risk, credit risk, Herstatt risk and
systemic risk.
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B
3 Fatwa resolution
- aatwa resolution is very essential to maintain public confdence through providing legal
certainty to the players. In some countries that operates Islamic fnancial institutions, aatwas have been compiled and standardized to
improve efciency.
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B
Supporting policies
Supporting policies
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IV. Supporting policies
B
1 Monetary policy
The monetary policy is made to provide clear
signals to the market by using conventional as well as sharia compliant instruments.
2 Fiscal policy
The government can also participate in the development oa Islamic fnance by a regular
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B
Crisis management
protocol
Crisis management
protocol
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V. Crisis management protocol
B
Financial policies should be set based on two
possible condition: normal business and during the period oa crisis.
- The CMP serves as the anticipatory action to maintain the operational soundness oa the fnancial system even ia it operates under a signifcant fnancial pressure so that the
intermediary aunction can always be peraormed. - The CPM should promote possible prompt
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B
Business continuity plan (BCP) – The fnancial
authorities require the Islamic fnancial institutions to have business continuity plan to anticipate signifcant fnancial disturbance. The BCP should also be
supported by qualifed human resource and adequate inaormation technology that allows the management to take right actions whenever necessary.
Framework for coordination – Setting up a solid legal aoundation aor the coordination activities among the parties involved in the CMP decision making
process. This includes procedures aor decision
making process, roles and responsibilities, fows oa inaormation and sets oa possible prompt corrective actions to be taken during the crisis.
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B
Early warning system – The inaormation system that is capable to indicate fnancial turmoil is very essential in the implementation oa CMP. Accurate
inaormation about the market allows the authority to defne the critical period based on the thresholds set by the fnancial stability committee and decide the actions to be taken.
Stress test – The fnancial authority may require the fnancial institutions and also themselves to conduct stress test. Proper stress test can improve mutual understanding among the market participants and regulator. It also allows them to regularly identiay weak areas that need to be improved.
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B
Solvency regime
Solvency regime
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B
VI. The solvency regime
At product level At product level
Sharia contracts
Types oa claims Types oa claims
Accounting standards Accounting
standards
Classifcation oa fnancial products that are compliant
to aatwas issued Classifcation oa fnancial products that are compliant
to aatwas issued
Accounting treatments leading
to the sound fnancial practices
Accounting treatments leading
to the sound fnancial practices Financial
classifcation describing the types oa claims and
possesion oa the assets
Financial classifcation describing the types oa claims and
possesion oa the assets
The basis aor aurther calculation like risk
management The basis aor aurther
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B
VI. The solvency regime
Risk
Operational sustainability Minimizing potential systemic Macro: costs
Macro:
Minimizing potential systemic costs
IRTI - Distance Learning 28
B
VI. The solvency regime
At institution and macro level At institution and macro level
0 maintenance cost and discount rate respectedly. The frst operator expresses the expected bail-out cost; whilst, the second operator expresses the present value oa the expected menyatakan maintenance cost drawn arom t to infnity. The supervisor selects the independent variables that are considered infuencing the two possible events :(x1,...xn-1,xn). It
is assumed that the operational sustainability oa Bank A is higher than Bank B ia > .
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Read! In the Name oa your Lord, Who has created (all that exists),
Has created man arom a clot.
Read! And your Lord is the Most Generous, Who has taught (the writing) by the pen, Has taught man that which he knew not.
B
