Mapping the Risks and Risk Management Practices in Islamic Banking

CHAPTER 4Capital Adequacy for Islamic Banks: A Survey

Capital isn't scarce; vision is

—Sam Walton

Financial liberalisation, as part of globalisation, has been followed keenly by developing countries since the 1990s. Several restrictions were eased, and self-regulation was considered to be the motivating factor. However, developments show that everything did not work well. There were several instances of malpractice, financial frauds and some failures. In responding to this, regulators started looking at the existing set of standards and ways to overcome the issue of balancing control and freedom. From simple capital provisions to comprehensive frameworks for risk management, the practice of risk management, as a result, has undergone wholesale transformation over the past two decades (Akkizidis and Khandelwal, 2007). More systematic transformation has taken place during the current straitened times. It is a fact that each country has its own set of regulations based on several parameters. The most common among them is the requirement to hold minimum capital indexed to the activities of the bank.

Capital adequacy is at the core of supervisory activities all over the world. It is an important benchmark for the soundness of financial institutions. It is gaining more prominence after the recent credit crunch, which saw numerous financial institutions collapsing because their capital was not big enough to absorb the risks they were taking. Developments have shown that the market ...