REGULATORS overseeing Islamic banking must revise guidance on real estate exposures to align with the post-financial crisis capital rules of Basel III, a global industry body said yesterday.
The Bahrain-based General Council for Islamic Banks and Financial Institutions (CIBAFI) said treatment of real estate across Islamic finance jurisdictions still reflected Basel II or pre-reform Basel III rules. But a revised version of Basel III, finalised in December 2017, introduced additional requirements including concentration limits and independent asset valuations.
Such requirements are important for Islamic banks as many have high exposure to real estate in both their investment and financing activities, coupled with the illiquid and cyclical nature of the asset class, CIBAFI said.
“As a result, Islamic banks may be hit particularly hard by any downturn in the real estate sector.”
Islamic commercial banks are estimated to hold more than US$1.3 trillion in assets globally, a sector considered systemically important in countries including Saudi Arabia, Qatar and Malaysia.
Around half of large Islamic banks and two-thirds of small Islamic banks have a high to very high exposure to real estate and mortgages, according to a CIBAFI industry survey.
Islamic banks in Bahrain, Jordan and Kuwait recorded roughly a 25 per cent exposure to real estate in their activities, CIBAFI data showed.
CIBAFI said national regulators must incorporate the Basel III revisions, while the Malaysia-based Islamic Financial Services Board (IFSB) should also revise its own capital adequacy standard for Islamic banks.
That standard, known as IFSB-15, had initially proposed concentration limits on real estate but these were not adopted in a final version, CIBAFI said.
This would have placed a cap on aggregate real estate investment exposures of 60 per cent of regulatory capital, with a 15 percent limit on single real estate investments. — Reuters