Regulatory Aspects of the Islamic Capital Market and Basel III Requirements

In the wake of the 2008 global economic and financial crisis, the Basel Committee on Banking Supervision (the Basel Committee) engaged in a massive and concerted effort to strengthen global capital and liquidity rules, with the overall objective of promoting great resilience in the banking sector. This chapter discusses the categorical underpinnings of the Basel III capital and liquidity framework documents, as well as discussing the IFSB's analysis of the Basel III categories as they apply to IIFS. Islamic financial instruments are generally composed of either asset-based contracts (as in the case of murabaha, salam and istisna'a, which are based on the purchase of an asset, ijarah, which is based on selling the usage benefits or usufruct of such an asset), profit sharing (musharaka and mudaraba), or sukuk. Such instruments involve exposure to various types of risk, notably market risk as well as credit risk.