The Basel Accords, Financial Turmoil and Islamic Banks

Abstract

The primary cause of the worldwide colossal failures of financial institutions—banks in particular—in the wake of the 2007–2008 turmoil was the heightened lure of leverage gains that led them to expand credit beyond what the volume and quality of their capital assets warranted. The devastation led to a major policy shift in finance at the national and international levels, with a focus on capital adequacy that financial institutions must observe for their own safety as well as the wider social interest. It was felt that a stringent and regular watch was needed to make adequacy norms work. The Basel Committee on Banking Supervision (BCBS) developed what are known as Accords (agreements) defining capital and its adequacy for banks to limit the risks they can take within reasonable confines. Incidentally, it is worth noting that Malaysia was in a sense preemptive in revamping its own regulatory framework. Also, the Islamic Financial Services Board (IFSB) was alert in announcing some new standards. This paper briefly takes stock of these developments with a view to seeing how far the Accords are needed for Islamic banks in view of the arrangements that are already in place.