Student Number

15197

Degree

Master of Science in Islamic Banking & Finance

Department

Department of Finance

Faculty/ School

Faculty of Business Administration (FBA)

Date of Award

Spring 2021

Advisor

Dr. Irum Saba, Associate Professor & Program Director MS-IBF, Department of Finance, Institution of Business Administration (IBA), Karachi, Pakistan

Project Type

MS IBF Research Project

Access Type

Restricted Access

Pages

ix, 38

Abstract

After the financial crises in banking markets and international currencies in 1974, The Bank for International Settlements (BIS) established a Basel Committee to frame the uniform and practical standards for the security and solidity of the international financial system. The committee issued Basel Accord, a series of Basel-I, Basel-II and Basel-III. Since the State Bank of Pakistan (SBP) is one of the world’s record active enforcers of the Basel Framework, it has adopted Base-III for all banks to calculate their CAR. However, since this system was designed for conventional banks, it does not properly address certain concepts used for some products of Islamic banks. So, there was a space to introduce a Shariah compliant version of Base-III. To bridge this gap, Malaysian based Islamic Financial Services Board (IFSB) designed and issued standards on capital adequacy as IFSB-15 in 2010-11. Now there are two methods to calculate the CAR. The First One is Basel-III and the second method is IFSB-15, a Shariah compliant version of Basel-III for Islamic banks. Islamic banks of Pakistan view that if SBP allows them to use the IFSB’s method to calculate their CAR, it will help the Islamic banks to improve their efficiency and increase their financing capacity, which can also accelerate economic activity in Pakistan. However, no comprehensive study in Pakistan has yet been done to show what exactly effects will occur on the CAR of Islamic banks when applying IFSB’s method. The research is an attempt to overcome this research gape. This study is an effort to devise a policy that will help SBP to issue a policy for Islamic banks to calculate their CAR via IFSB’s formula. The research focuses on the comparative valuation of CAR of Pakistani Islamic banks under IFSB-15 and Basel-III. The research methodology of the study is quantitative which focuses on the empirical study of CAR for five full-fledged Islamic banks of Pakistan for 5 years (2015-2019). Finally, the capability of both Basel-III and IFSB-15 is checked separately for Pakistani Islamic Banks. The study proves that IFSB’s method is more in line with the nature of Islamic banks’ contracts of Modarabah and Musharakah. The results highlight that the CAR of Islamic banks calculated under IFSB-15 is higher than that calculated under Basel-III. Therefore, SBP should issue the policy for Islamic banks to calculate their CAR via IFSB’s method.

Included in

Finance Commons

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