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Perspective of a European banking supervisory authority

Explore European perspective on Islamic finance regulations in the 2009 Rome conference. Analyze governance, legal qualification, liquidity management, and other regulatory questions.

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Perspective of a European banking supervisory authority

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  1. Perspective of a European banking supervisory authority Islamic finance conferenceRome - November 11th 2009 Michel CARDONA – General Secretary of the Credit Institutions and Investment Firms Committee (CECEI) Banque de France

  2. Introduction (1) • Europeanrules have not takenintoaccount the specifics of islamicbanking • No islamicbankstatus • Islamicbanks must meet the usuallicensingcriteria • Islamicbanks are subject to the sameprudential supervision and the samereportingrequirements • No specificregulation • Islamicbanks must complywith standard supervisoryregulations • No Islamic money market • Islamicbanks must deal with the currentconventionalframework for monetaryoperations

  3. Introduction(2) • How to best accomodateIslamicbanking: • Non discrimination • Levelplayingfield • Smoothfunctioning • Four avenues for reflexion: • Governance and transparency • Legal qualification of Islamicproducts • Liquidity management • Otherregulatory questions

  4. 1. Governance and transparency 1.1. The Sharia board - Composition. • The composition of the Sharia boardisindependantfrom the board of the company. It’s a separateentity - Roletowards the bank management • The Sharia boardissolely in charge of certificatingproducts and processes • It has no implication in the management

  5. 1. Governance and transparency 1.2. Compliancewith Sharia boardrulings - Audit Sharia • There is a need of Sharia audit distinct fromconventional audit • The Sharia board is responsible for Sharia audit - Legalcompliance • Compliance audit ensures the respect of legal provisions • No interference of compliance audit with Sharia compliance

  6. 1. Governance and transparency 1.3 Transparencytowardsconsumers/counterparts - Reputationrisk • Customerschoose an Islamicbanktakingintoconsiderationits Sharia compliance and the reputation of itsscholars • Lack of consensus amongislamicscholarsmayrepresent a potentialrisk - Disclosure and risk mitigation • Full disclosure of Sharia boardrulings and of Sharia audit couldbe a way to minimizethisrisk

  7. 2. Legal qualification of Islamic products 2.1 On the liabilityside • The legal qualification of ressources collectedfromcustomers. Someshouldbeconsidered as « deposits » • The treatment vis-à-vis the depositguarantyscheme • Manyscholarsestimatethislegal obligation iscompliantwithSharia’sprinciplesundersome conditions • The lack of harmonization of savingproducts

  8. 2. Legal qualification of Islamic products 2.2 On the assetside • The legalstatus of financingoperations • The prudential implication: prudentialtreatmentdepends on the legal and accounting classification • The consumer protection (for retailbanking): how to meetlegalrequirements ?

  9. 3. Liquidity management 3.1 Day to day management • No access to an islamic money market and no liquidsukukmarket • Islamicbanks have to use specificproductssuch as commoditiesmurabahas; but those instruments are difficult to negociate • Only a few large banks are able to deal withIslamicbanksbecause of the lack of expertise • There’s a gap between large institutions and smallIslamicbanks

  10. 3. Liquidity management 3.2 Liquidity stress management • No acces to an Islamic central bankfacility; European central banksfacilities are non Sharia’scompliant • Eligiblecollateral: In principle, itseems possible for someIslamicfinancingoperations (e.g. ijaras) • But specificcontracts are needed to evaluatetheireligibility; the question isstillunderreview

  11. 3. Liquidity management 3.3 Prudentialconsequences • liquidity buffers: Islamicbanksmayberequired to holdlargeramounts of liquidassets • creditlines: securizedcreditlinesfrom parent company and/or first rankbanksmayberequired • liquidity ratio: calculation of the previsional ratio willbeasked in the licensingprocess

  12. 4. Other regulatory questions Definition of prudentialownfunds • The question of investmentaccountsbased on risk sharing • Standard approach for ownfundscalculationis to beused Operationalrisks • Islamicbankingisbased on a chain of legalcontracts • The question of the underlyingassets and risksattached Concentration risks • On liquidity: shortage of instruments (sukuks, commoditiesmuhabara…) impliesspeculativerisks on smallmarkets • On sectorial concentration (real estate, geographic...)

  13. As a tentative conclusion: • Cooperationisneededwith: • International Islamic Institutions • DomesticIslamicsupervisoryauthorities • OtherEuropeansupervisoryauthorities

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