KEY ISSUES Overview on Basel II & Islamic Compliance Standard (i-CS)

1. Basel II: Challenges Ahead For Applied Islamic Financial Sectors Across the world as to Financial Risks Prof. Dr. Mohd. Ma’sumBillah www.drmasumbillah.blogspot.com Grand Hyatt , Singapore

2. KEY ISSUES • Overview on Basel II & Islamic Compliance Standard (i-CS) • Principles For Minimum Shari’ah Compliance by Discovery of Risks In Various Avenues Of Islamic Financial Management • Shari’ah Mechanisms for Minimizing Financial Risks • Consequential Impact for Failure to Manage Financial Risks

3. Overview on Basel II & Islamic Compliance Standard (i-CS) • Basel I International Convergence of Capital Measurement and Capital Standards, July 1988 • Basel II International Convergence of Capital Measurement and Capital Standards: A Revised Framework, June 2004 • IIFS Institutions (other than Insurance Institutions) offering only Islamic Financial Services • IFSB Islamic Financial Services Board. • i-CAS Islamic Capital Adequacy Standard (Lead by IFSB). • The proposals contained in i-CAS are primarily based on the Basel Committee on Banking Supervision’s documents on the (a) International Convergence of Capital Measurement and Capital Standards: A Revised Framework, June 2004 (Basel II) and (b) Amendment to the Capital Accord to Incorporate Market Risks, January 1996 (1996 Market Risk Amendment), with the necessary modifications and adaptations to cater for the specificities and characteristics of the Sharī`ah compliant products and services offered by the IIFS.

4. Principles For Minimum Shari’ah Compliance Discovery of Risks In Various Avenues Of Islamic Financial Management • Self Estimation Risks (Skill, Ethics, PR, Commitment, Smartness, Wisdom, Mutual Respect & Tolerance) • Misconception & Unnecessary Debate • Regulatory Risk • Monetary @ Regulatory vs Supervisory Authority • Environmental Risks • Political Risks • Irrational Decision Making • Deposit Risks • Investment Risks • Selection of Instruments Risks

5. Profit Sharing Investment Account Management Risks Operational Risks Selection Risks in General Accounting Risks Lack of Disclosure Market Risks Natural Risks Lack of Customers’ Commitment & Cooperation Credit Risks Careless Execution Unhealthy Competition Poor Review Exercise Continue..................

6. Shari’ah Mechanisms for Minimizing Financial Risks • Regulations & Policy Review Process • Supervisory Review Process • Management Review Process • Rationalism Dominate Applications • Market Discipline • Product Innovation • Adaptation of Suitable Instruments • Staff & Management Enrichment Programs • Public Awareness Programs • R & D • Accurate Guidance • Dynamism with Wisdom, Smartness, Tolerance & Mutual Respect

7. MURĀBAHAH AND MURĀBAHAH FOR THE PURCHASE ORDERER Credit Risk Market Risk Summary of Capital Requirement at Various Stages of the Contract SALAM Credit Risk Market Risk Summary of Capital Requirement at Various Stages of the Contract\ ISTISNĀ Credit Risk Market Risk Summary of Capital Requirement at Various Stages of the Contract IJĀRAH AND IJĀRAH MUNTAHIA BITTAMLEEK Credit Risk Market Risk Summary of Capital Requirement at Various Stages of the Contract MUSHĀRAKAH AND DIMINISHING MUSHĀRAKAH Equity Position Risk Summary of Capital Requirements for Mushārakah Categories Minimum Capital Requirements For Islamic Financing Assets

8. MUDĀRABAH Equity Position Risk Summary of Capital Requirements for Muḍārabah Categories SUKŪK Salam sukūk Istisnā` sukūk Ijārah sukūk Mushārakah sukūk Muḍārabah (Muqaraḍah) sukūk Exclusion Summary of Capital Requirements for Sukūk Continue……….

9. Consequential Impact for Failure to Manage Financial Risks • Unjustifiable Pricing • Discouragement of Public • Weakening the Back Bone & the Growth of the Industry • Leading to Socio-Economic Damages

10. THANK YOU WASSALAM