Real estate treatment by lenders still reflect Basel II norms.
Reuters reports that Islamic banking rules on real estate exposure remain behind the times as they still reflect Basel II or pre-reform Basel III standards, according to the General Council for Islamic Banks and Financial Institutions (CIBAFI).
A revised version of Basel III, finalised in December 2017, introduced additional requirements for how Islamic banks should treat real estate including concentration limits and independent asset valuations given its nature as an illiquid and cyclical asset class.
Around half of large Islamic banks and two-thirds of small Islamic banks have high to very high exposure to real estate and mortgages, according to a CIBAFI industry survey.
“As a result, Islamic banks may be hit particularly hard by any downturn in the real estate sector.”
CIBAFI urged national regulators to incorporate the Basel III revisions, whilst the Malaysia-based Islamic Financial Services Board (IFSB) should also revise its own capital adequacy standard for Islamic banks.
Islamic commercial banks are systemically important in Middle East countries of Saudi Arabia and Qatar although it has been booking fast growth rates in Malaysia after expanding by 10.3% in 2017 versus 1.7% for conventional banks, according to RAM Ratings.
“Our analysis shows that Islamic financing has overtaken conventional loans as the growth driver for the [Malaysia] domestic banking system in recent years. Islamic financing accounted for 71% of the increase in the banking system’s financing in 2017,” said RAM co-head of financial institution ratings Wong Yin Ching.
The Indonesian government is also fast-tracking reforms to drive growth in the Islamic banking sector with the launch of the 10-year national Islamic finance master plan released last year following the formation of the National Committee for Islamic Finance in July in an effort to boost low penetration levels of 5-10%.
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