Islamic Capital Markets and Products

CHAPTER 10Regulatory Aspects of the Islamic Capital Market and Basel III Requirements – Shari'ah-Compliant Bank Capital Instruments

By Rafe Haneef

The global financial crisis of 2008 resulted in several banks across the globe facing an existential threat. The global panic that ensued dragged the great and the good of the banking fraternity close to the abyss of insolvency, posing a systemic risk to the wider global economic system. Despite massive government bailout programmes, not every bank could be saved from crossing the event horizon, resulting in three of the most venerable names on Wall Street – Bear Stearns, Lehman Brothers and Merrill Lynch – going to the wall, as well as the British bank Northern Rock.

The shock of the global financial crisis prompted regulatory authorities to consider the stability of financial markets and put in place measures that would bolster the shock absorption mechanism of its participants. For banks, the major focus area is on strengthening global capital and liquidity rules.

In December 2010, the Basel Committee on Banking Supervision (BCBS) published the Third Basel Accord (Basel III standards) to replace the Basel II standards, which were considered unsuitable in the post-crisis banking landscape. The Basel III standards aim to improve the quality of bank capital, reduce counterparty risk, constrain over-leverage and improve liquidity risk management.

BANK CAPITAL REQUIREMENTS: BASEL II VS. BASEL III

Basel III refines the definition ...