Regulatory Supervision
This domain tests how prudential regulation adapts to Islamic banking: capital, liquidity, licensing models and supervisory review.
Standards and law
IFSB-1 (risk management), IFSB-2 and IFSB-15 (capital adequacy), IFSB-3 (corporate governance), IFSB-10 (Sharia governance), IFSB-12 (liquidity risk management), IFSB-16 (supervisory review process), IFSB-17 (stress testing). Basel II/III pillars are applied with adjustments for profit-sharing investment accounts. National statutes sit on top: licensing, capital minima, single-exposure limits, deposit protection.
Licensing models
Full-fledged Islamic bank; Islamic subsidiary of a conventional group; Islamic window with segregated funds and a dedicated SSB and governance structure.
Supervisory issues
- Treatment of unrestricted IAH funds as quasi-equity or deposits, which determines the bank's capital requirement.
- Liquidity: absence of a conventional lender of last resort, reliance on commodity murabaha, sukuk and central bank Islamic facilities.
- Stress testing covering rate-of-return shocks and deposit migration.
- Supervisory review of Sharia governance, not just financial ratios.
Worked example
A supervisor assesses a bank where IAH funds are 45% of funding and returns have been smoothed from PER for three consecutive quarters. Reasoning: the supervisor must decide whether the smoothing is a legitimate commercial decision or evidence that the bank is absorbing losses on behalf of IAH. If the latter, the IAH funds behave like deposits and the capital requirement must rise, with full disclosure and a remediation plan.
Traps
Applying Basel weights unchanged; ignoring the treatment of IAH as a supervisory variable; forgetting that Sharia governance is a supervisory matter.