Islamic Finance: The New Regulatory Challenge, 2nd Edition

Chapter 22

Transparency and Market Discipline: Post–Basel Pillar 3

Daud Abdullah (David Vicary)

1. INTRODUCTION

In the wake of the financial crisis that started in 2007, there have been significant developments in the global financial services industry. In particular, the world economies were hit by a major global financial crisis, by most accounts the worst since the Great Depression, which was triggered by the subprime crisis in the United States. According to the Federal Deposit Insurance Corporation (FDIC), the regulator for the banking industry in the United States, prior to the financial crisis, from 2000 to 2007, a total of 27 banks had failed. Since then, however, a further 412 banks had folded between 2008 and November 2011—a staggering 15-fold increase! The root causes of these failures have been well documented by The Financial Crisis Inquiry Report1 released in January 2011, which, while beyond the scope of the present chapter, is essential reading in order to be able to see the fuller picture.

How did the Islamic financial services industry perform during the financial crisis? Recent studies seem to suggest that, under specific conditions, Islamic banks performed better than their conventional counterparts during and post–financial crisis.2 To date, at least three Islamic banks across the globe have failed. Ihlas Finans House of Turkey was shut down in 2001 due to issues relating to liquidity; Albaraka International Bank in the United Kingdom was closed in 1993 in ...