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Managing Islamic Deposit Insurance in a Dual Banking System: the Malaysian Experience Dato’ Mohd Razif Abd Kadir Deputy Governor. 6 th IADI Annual Conference 1 November 2007. Outline. Financial Safety Net The Need for Islamic Deposit Insurance Islamic Deposit Insurance Model
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Managing Islamic Deposit Insurance in a Dual Banking System: the Malaysian Experience Dato’ Mohd Razif Abd Kadir Deputy Governor 6th IADI Annual Conference 1 November 2007
Outline • Financial Safety Net • The Need for Islamic Deposit Insurance • Islamic Deposit Insurance Model • Issues & Challenges
Main Components of Financial Safety Net Need to maintain financial stability for sustainable economic growth Financial Stability Robust & Sound Banking System Depositors’ Protection FINANCIAL SAFETY NET Prudential regulation & supervision Lender-of-last resort Intervention & resolution mechanisms Deposit insurance system
Malaysia’s Islamic Financial System…the journey 1st Islamic bank Financial Sector Master Plan Islamic money market Islamic window Tabung Haji 1st takaful company M’sian Islamic Financial Centre New takaful & retakaful company Foreign Islamic banks Islamic subsidiary Islamic capital market Strong Growth of Islamic Banking Assets… 2000-2006: average annual growth 18.8% Introduction of Islamic banking window … • The journey: • Instituted comprehensive Islamic financial system with diversity of players & wide range of products supported by robust legal, Shariah & regulatory framework, has effectively establish a viable dual banking system… ISLAMIC BANKING & FINANCE IN MALAYSIA Source: Bank Negara Malaysia (BNM)
Need to have Islamic deposit insurance system to maintain sustainability of Islamic financial system & overall stability of financial system… Islamic banking operating parallel with entrenched conventional banking… Depositors Implicit guarantee Government Target same customer pool Implicit guarantee already in place before introduction of deposit insurance system… Islamic Banking Conventional Banking In introducing explicit deposit insurance system, do we have a choice to exclude Islamic deposits? No! • Financial safetynet* as necessary condition for doing business & to maintain financial stability for economic growth - instill public confidence • No compromise on financial stability – avoid systemic risk • Islamic banking must be as competitive vis-à-vis conventional banking • Need separate Islamic deposit insurance operating parallel with conventional deposit insurance – in accordance to Shariah principles * Including deposit insurance system
Mechanism for Deposit Insurance Funds • Guiding Principles: • Minimise duplication of functions/ regulatory requirements – least cost resolution • MDIC is independent but close co-operation & co-ordination with BNM on regulation & supervision • Costs borne by banking system – through contribution (premiums) • Equitable system – Islamic deposit insurance operates side by side with conventional deposit insurance under MDIC DEPOSITORS DEPOSITORS Deposits • MDIC funds provided for: • Immediate payment to depositors of non viable banks; and • Facilitate resolution of troubled banks FINANCIAL INSTITUTION’S FAILURE FINANCIAL INSTITUTIONS Contribution (premium) MDIC Assessment & resolution BNM • MDIC may seek credit from government for temporary liquidity • MDIC will repay to government via adjusted premium rate FUND INVESTMENT • Islamic Fund • Conventional Fund GOVERNMENT CREDIT FACILITY BNM - Bank Negara Malaysia; MDIC – Malaysia Deposit Insurance Corporation
Rationale oninsurancecoverage of mudharabah deposits… • As prudential measure with overall objective of promoting integrity & stability of banking system (“Maslahah” – public interest) • Mudharabah deposits* – (49.2% of total deposits) • If mudharabah deposits are not covered while conventional banks are covered by deposit insurance, it may expose to systemic risk • MDIC will provide insurance coverage only in the event of bank failure • Under normal course of banking business, depositors expose to the risk of losing their capital – consistent with concept of mudharabah Rationale • Deposit insurance covered by 3rd party guarantee not by bank itself • MDIC will provide 3rd party insurance coverage (consistent with Shariahprinciples) • Mudharabah deposits has lower priority of payments than Wadiah deposits • Current practice, mudharabah deposits (general investment account - GIA)* are managed & behave similar to “near deposit” rather than pure investment • Not fully recognised mudharabah deposits as risk absorbent for Islamic banks In future, continuous assessment - to ascertain insurability of mudharabah deposits * Main types of mudharabah deposits - General Investment Account (GIA) & Specific Investment Account (SIA)
Interrelationship between BNM and MDIC Guiding Principles • Transparency in presentation of the issues • Accountability of each organisation for areas within their mandate • Timely and clear communication • In resolving conflict of interest issues, the overriding goal shall be the stability of financial system • Respect & valuing the diversity of experience that both organisations would bring to the discussion table Mechanism • Governor as an ex-officio member in MDIC’s Board of Directors • Guide to Intervention outlines the intervention processes to be applied to member institutions by BNM and MDIC • Strategic Alliance Agreement sets out areas resources & information sharing • Liaison Committee to identify issues for co-ordination and resolution • Regular meetings to resolve bilateral issues BNM - Bank Negara Malaysia; MDIC – Malaysia Deposit Insurance Corporation
Islamic Deposit Insurance Model • Provide insurance coverage when bank fails (3rd party guarantee) • Deposit money Depositors Islamic Banks • Contribution (premium) based on Tabarru’ Separation & equitable treatment principles • Separate management of funds • Funded by contribution (premium) collected from Islamic banks • Pooled contribution (funds) managed separately • Invest in Shariah compliant instruments • Separate Payout • Separate payment in event of failure • Islamic deposit insurance funds used only for Islamic banks • Deficit contribution - can raise funds from government based on Shariahprinciples • Separate Premium Assessment • Separate deposit premium assessment system for Islamic & conventional • Separate supervisory assessment for Islamic & conventional banking institutions (incl. windows) • Equivalent Coverage Limit • Islamic deposit covered separately from conventional • All coverage limit -similar to conventional • Up to RM60k per depositor per member institution • Covers 90% of total depositors* Dedicated Deposit Insurance Act covers provision on Islamic deposit insurance * Based on BNM Survey
Issues and Challenges • Should risk premium assessment methodology be different from conventional banking? • Should premium assessment on Islamic windows be separated from their parent conventional banks? • To address distinct features / structure of Islamic banking • Consideration on profit sharing investment account as risk absorbent • Absence of guiding principles on Islamic deposit insurance • Operation and establishment of Islamic deposit insurance scheme • Collaboration & cooperation between Islamic Financial Service Board (IFSB) and International Association Deposit Insurers (IADI) Committee • Liquidation of assets in event of bank failure • Cross border liquidation of assets - globalisation • Priority of payments of new contracts applied to deposits (e.g. wakalah, musharakah contracts) • Actual liquidation process (e.g. liquidation of assets funded by specific investment accounts) • Limited avenue for investment on Islamic financial instruments • Demand exceed supply • Need for continuous innovation
THANK YOU 6th IADI Annual Conference 1 November 2007 Mission A vibrant, innovative and competitive international Islamic financial services industry in Malaysia, supported by high calibre human talents, world-class infrastructure and best international standards