Implications of Basel Iii on Islamic Banks

Implications of Basel III
On Islamic Banks

Sabira Rizwan
Noira Khan
Hafizullah Khan

Table of Contents
Introduction 3
Literature Review 3
Methodology 5
Capital Requirements 7
Leverage ratios 10
Liquidity ratios 11
LCR 11
The application of the liquidity ratios 12
Limitations 15
Conclusion 16
References 18
Appendix 19

Basel III is the latest global regulatory standard on bank capital adequacy and liquidity. It was introduced mainly to prevent a repeat of the recent financial crises by taking into account various points in the Basel II agreement and strengthening them. Compliance with these international rules has become even more important in today’s recessive economy and many Islamic banks, although comprise a small sector of the worldwide banking industry, are already beginning to incorporate these guidelines into their operations. Following the latest guidelines means that banks, both Islamic and conventional, will have new costs and requirements to consider.
This paper examines the effects of these regulations on Islamic banks worldwide. It shows the different aspects of the Basel III agreement and its implications on the Islamic Banking Sector. It considers the costs of changes that banks will have to make to their financial system in order to meet the new Basel requirements. The paper will also include an analysis as to how banks may strive to meet the new requirements without pushing costs too high.
Literature Review
The Basel Agreements affect banks around the world. After the initial Basel Agreement, there have been two revised versions produced. The initial Agreement was created after a number of consecutive bank collapses between late 1960 and early 1980. It was made to enforce a limit to the risk exposure of banks around the World. Over the years, there were some serious limitations in Basel 1 that banks exploited thus Basel II and III were formed.   Basel III was created primarily due to the...