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Financial Stability Dr Dadang Muljawan

Financial Stability Dr Dadang Muljawan. Contents of discussion. The basic concepts. Sources of funds. Financing products. Other services. B. 1. Introduction. I. Introduction. B. A sound and efficient Islamic financial system is capable to:. - Mobilize public funds.

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Financial Stability Dr Dadang Muljawan

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  1. Financial Stability Dr DadangMuljawan

  2. Contents of discussion The basic concepts Sources of funds Financing products Other services

  3. B 1 Introduction

  4. I. Introduction B A sound and efficient Islamic financial system is capable to: - Mobilize public funds - Optimize resource allocation process - Facilitate the transactions of goods and services - Promote fair competition in the Islamic financial industry - Promote product innovation and flexibility - Promote good governance and risk management - Provide adequate customer protection

  5. I. Introduction B Sources of instability Internal factors External factors Stability and robustness - Fraud - Currency volatility - Inefficiency - Price volatility - Illiquid market - Imported inflation - No safety net - Panic

  6. I. Introduction B Stable and robust Islamic financial system requires: • Strong institutions and markets • Efficient infrastructure • Supporting policies • Crisis management protocol

  7. B 2 The pillars

  8. Islamic banking II. The pillars B Finance co’y Takaful Capital Market and Money market Islamic pawn house Zakat institution Micro finance Strong Islamic financial institutions and markets Competence, GCG and risk management, information system, market structure, supervision and customer protection

  9. II. The pillars B Strong Islamic financial institutions and markets 1 Improving level of competence • Developstandard for training to promote technical competence (in terms of financial and sharia aspects), integrity, and business ethics and sharia principles for the players as and supervisors. • Certification program for Islamic financial professionals • Regular review on the materials of the training and certification program.

  10. II. The pillars B 2 Good governance and risk management • The implementation of good governance principlesfor the Islamic financial institutions. • Standard guidance for governance, risk management and business continuity plan which adopts the international accounting standards and IFSB prudential standards. • Periodical review to adopt any developments including products and regulatory approach.

  11. II. The pillars B 3 Information system • The information system should be capable in providing accurate and timely information covering Islamic financial subsectors whenever required. The development of the informational system is aimed at promoting efficiency and accuracy of the financial authority when making strategic decisions. This information exchange would also improve the capability of the system to conduct surveillance activities comprehensively.

  12. II. The pillars B 4 Market structure • The capability of the Islamic financial institutions to play significant role in financial intermediation and risk management is also affected by the soundness, efficiency and liquidity of the market. The development process should be able to consolidate the development plan of each sector and focus on the financial deepening that maximizes the benefits of the financial system to the real economic development program.

  13. II. The pillars B 5 Regulation and supervision • The development of the supervisory system should accomodate the need for cross-sectorial supervisory capability supported by appropriate system and man-power. • Information exchange program among financial authrities is very important, particularly as a foundation for establishing an early warning system that is capable of foreseeing potential disturbance to the financial system.

  14. II. The pillars B • Customers and investor protection program is aimed at minimizing the vulnerability to any financial disturbance caused by unverifiable information or destructive rumors. • Transparency and financial performance are mutually reinforcing. 6 Customer protection

  15. B 3 Infrastructure

  16. III. Efficient infrastructure B 1 Deposit insurance • Deposit insurance plays a very fundamental role in maintaining public confidence high by providing a certain level of deposit repayment guarantee, particularly to the retail depositors, in the case of bank closure. • Public may not get well informed about the difference between underlying transactions applied in the deposit products and the investment products. • Operationally, the deposit insurance company should take part in the supervisory activities to ensure systemic stability.

  17. III. Efficient infrastructure B 2 Payment system • A reliable and efficient payment system plays an important role to support development in an Islamic financial market and, subsequently, the economic development by facilitating financial transactions among the economic players. • The sistem designed should be able to minimize risks resulted from the settlement process such as liquidity risk, credit risk, Herstatt risk and systemic risk.

  18. III. Efficient infrastructure B 3 Fatwa resolution • fatwa resolution is very essential to maintain public confidence through providing legal certainty to the players. In some countries that operates Islamic financial institutions, fatwas have been compiled and standardized to improve efficiency.

  19. B 4 Supporting policies

  20. IV. Supporting policies B 1 Monetary policy The monetary policy is made to provide clear signals to the market by using conventional as well as sharia compliant instruments. 2 Fiscal policy The government can also participate in the development of Islamic finance by a regular issuance of Islamic government securities or sukuk locally and internationally.

  21. B 5 Crisis management protocol

  22. V. Crisis management protocol B Financial policies should be set based on two possible condition: normal business and during the period of crisis. • The CMP serves as the anticipatory action to maintain the operational soundness of the financial system even if it operates under a significant financial pressure so that the intermediary function can always be performed. • The CPM should promote possible prompt corrective actions to stabilize the system whenever necessary.

  23. V. Crisis management protocol B Business continuity plan (BCP) – The financial authorities require the Islamic financial institutions to have business continuity plan to anticipate significant financial disturbance. The BCP should also be supported by qualified human resource and adequate information technology that allows the management to take right actions whenever necessary. Framework for coordination – Setting up a solid legal foundation for the coordination activities among the parties involved in the CMP decision making process. This includes procedures for decision making process, roles and responsibilities, flows of information and sets of possible prompt corrective actions to be taken during the crisis.

  24. V. Crisis management protocol B Early warning system – The information system that is capable to indicate financial turmoil is very essential in the implementation of CMP. Accurate information about the market allows the authority to define the critical period based on the thresholds set by the financial stability committee and decide the actions to be taken. Stress test – The financial authority may require the financial institutions and also themselves to conduct stress test. Proper stress test can improve mutual understanding among the market participants and regulator. It also allows them to regularly identify weak areas that need to be improved.

  25. B 6 Solvency regime

  26. VI. The solvency regime B At product level Classification of financial products that are compliant to fatwas issued Sharia contracts Accounting treatments leading to the sound financial practices Accounting standards Financial classification describing the types of claims and possesion of the assets Types of claims The basis for further calculation like risk management Expected residual value

  27. VI. The solvency regime B At institution and macro level Objectives Micro: Operational sustainability Macro: Minimizing potential systemic costs Expected loss Deposit insurance Fiscal constraints Risk management Networth level Cost minimizing Exit policy

  28. VI. The solvency regime B At institution and macro level The networth and optimal stopping time: where p, CBO, CM and G=1/r represent the potential of having a bail-out, the cost resulted from a bail-out process,a maintenance cost and discount rate respectedly. The first operatorexpresses the expected bail-out cost; whilst, the second operator expresses the present value of the expected menyatakan maintenance cost drawn from t to infinity. The supervisor selects the independent variables that are considered influencing the two possible eventsp:p(x1,...xn-1,xn). It is assumed that the operational sustainability of Bank A is higher than Bank B if pA>pB.

  29. Read! In the Name of your Lord, Who has created (all that exists), Has created man from a clot. Read! And your Lord is the Most Generous, Who has taught (the writing) by the pen, Has taught man that which he knew not. B Thank you for your kind attention and support

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