Islamic Banking Malaysia

THE IMPLEMENTATION OF BASEL II BY ISLAMIC BANKS: THE CASE OF BANK ISLAM MALAYSIA BERHAD

Abdou DIAW PhD Candidate at the International Centre for Education in Islamic Finance (INCEIF) Tel: 0060126202694 Email: abdoulkarimdiaw@yahoo.com

Omaima El Tahir Babikir PhD Candidate at the International Centre for Education in Islamic Finance (INCEIF) Tel: 0060166002184 Email: omymakh@gmail.com

Abstract

This paper is a case study of the implementation of Basel II Accords, under the reformulation of IFSB, by Islamic banks with special reference to Bank Islamic Malaysia Berhad (BIMB), the first Islamic bank in Malaysia. We have analyzed the content of BIMB annual reports and interviewed a senior executive to determine the extent of the implementation and to identify the issues. We have found that BIMB is using the standardized and basic indicator approaches for the calculation of risk weighted assets. Among all the 3 types of risk that require capital for their management in the context of Basel II, credit risk is the most important at BIMB, as its proportion in the total risk weighted assets is more than 86%. This can be explained by the overreliance of BIMB on debt instruments in its financing activities, corresponding to more 99%, while equity based financing represents 0.1%. Basel II seemed to favor the big banks which are able to set up the required infrastructure for the implementation of advance approaches for risk measurement, which could allow them to qualify for less capital charge. However, the new proposal by the Basel Committee in the aftermath of the crisis is likely to reduce that advantage given to the big banks.

Key Words: Risk management, Basel II, IFSB, Bank Islam.

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1. INTRODUCTION. In the aftermath of the recent financial crisis, many have pointed out the deregulation in most of the financial markets as a determinant cause of the crisis. Though deregulation was thought to be a sine qua non condition for a well functioning financial markets, one of...