Basel III can strengthen Islamic Finance

Aug 25, 2014

According to a Standard and Poor’s (S&P) report published on 18th August, the terms of Basel III are to strengthen Islamic finance.

According to a Standard and Poor’s (S&P) report published on 18th August, the terms of Basel III are to strengthen Islamic finance. They will help the sector reach a worldwide worth of $2,000 billion by the end of the year.

To explain how Basel III will support Islamic finance, S&P wrote: “These buffers will ultimately help Islamic banks to cope better with the cyclical nature of the economies of the countries in which they operate and major business activities”.

Furthermore, according to the rating agency, “the introduction of a liquidity coverage ratio (LCR) should answer the sector’s long term weaknesses, particularly with regard to the lack of high quality liquid assets (aside from cash and reserves with national banks) ”.

However, Basel III isn’t without challenges for Islamic banking. Indeed, the treatment of profit sharing investment accounts (PSIAs) from a liquidity and funding perspective could have consequences on the liquidity of Islamic banks, according to Agence Ecofin.

Signed off in 2010 by the G20 as an answer to the 2007 financial crisis, the Third Basel Accord aims to regulate the banking system to avoid another increase in derivatives and the poor quality of equity.ADNFCR-2976-ID-801744239-ADNFCR