www.bt.com.bn - TREATING Profit-Sharing Investment Accounts (PSIA) as "deposit-like" products would expose Islamic banks to credit, market and operational risks, a general manager of the Central Bank of Sudan said here yesterday.
Dr Badreldin Gurashi Mustafa (pictured), the general manager of Banking System Regulation and Development, said that neither restricted nor unrestricted PSIA should form part of the bank's own capital, as outlined by international standard-setting body Islamic Financial Services Board (IFSB) on capital adequacy requirements for PSIA. (source)
Dr Badreldin Gurashi Mustafa (pictured), the general manager of Banking System Regulation and Development, said that neither restricted nor unrestricted PSIA should form part of the bank's own capital, as outlined by international standard-setting body Islamic Financial Services Board (IFSB) on capital adequacy requirements for PSIA. (source)
Under a Mudarabah contract, investment account holders (IAHs) provided the funding (Rab'ul Mal), while the Islamic bank provided the labour (Mudarib).
Syariah requires, however, that the Mudarib make no promise of any principal or percentage of profit from the investments. Meanwhile, losses and risks would be borne by the Rab'ul Mal, unless there was evidence of negligence or misconduct on the part of the Mudarib, in which the financial institution would be liable for the IAH capital.
"Therefore, credit and market risks of the investment made by the IAH shall normally be borne by the IAH themselves, while the operational risk is borne solely by the IIFS (Islamic financial services)," Dr Badreldin said during an IFSB-organised seminar on emerging Syariah issues in regulatory capital and risk management in Islamic banking.
He said that PSIAs were investment products by nature, and were not "capital certain", adding that Islamic banks could not guarantee a return on the investment as stipulated by the Mudarabah contract.
"However, in practice, unrestricted PSIAs could be treated as deposit-like products when there is a sharing of returns and risks between IBs and PSIAs," he said.
The extent of this risk-sharing was influenced by factors such as competition, regulatory requirements and the bank's management strategy.
Dr Badreldin pointed out that in spite of the Mudarabah conditions, competitive pressure could cause the Mudarib to pay out a market-based return to the IAHs as assurance in preventing them from withdrawing their capital with the IIFS.
This payout of market-related returns could also be authorised by the regulators as a means to mitigate "systemic risks that might arise from customers withdrawals in response to low returns".
The bank's own management strategy could be to smooth and pay out returns to the PSIAs, through mechanisms such as forgoing part or all of their Mudarib share, using shareholder funds or digging into reserves to cover losses and smooth profits.
However, the latter would result in displaced commercial risk, Dr Badreldin said.
In Sudan's case, the general manager said that the central bank required Islamic banks to get approval from them before smoothing returns to IAHs.
"A major problem arising from smoothing practices is the lack of transparency with regards to return on investment. This lack of transparency makes it very difficult to unrestricted PSIAs to monitor the performance of investment fund under the management of Islamic banks," he said.
Citing IFSB conditions, he added that central banks and monetary authorities must request Islamic banks to comply with IFSB standards, including the disclosure to promote transparency and market discipline.
The Brunei Times
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