Basel Accords and Islamic banking: A critical evaluation

Abstract

The worldwide colossal failures of financial institutions in the wake of the 2007–2010 financial turmoil the yesteryear advocates of liberalization and privatization converted almost overnight into vocal supporters of raising the safety walls around the interests of various stakeholders, especially the depositors. Admittedly, it was the heightened lure of leverage gains that led the financial institutions to expand credit beyond what the volume and quality of their capital assets warranted without crossing the limits of safety. The devastation led to a paradigm shift, so to say, at the national and international level in finance focusing on liquidity coverage of obligations that financial institutions must maintain for their own safety as also in the wider social interest. Stringent and regular watch was needed; it was felt, to ensure the compliance. The Basel Committee on Banking Supervision (BCBS), an organ of the Bank for International Settlements (BIS) developed what are known as Accords i.e. agreements defining capital and its adequacy for banks to keep the risk they could take within limits of safety. It is interesting to find that Malaysia was in a sense predictive of events that unfolded to revamp and strengthen its own regulatory framework. Also, the IFSB was alert to announce some new standards. This paper attempts a critical appraisal of these developments with a view to assess how far Islamic banks really need Basel Accords and are likely to absorb them without being cumbersome.