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The IFSB Issues Two New Working Papers on: Assessing the Stability of Islamic Banking Amid COVID-19, and Digital Transformations in Islamic Banking

Date posted: 22 February 2021

22 February 2021, Kuala Lumpur – The Islamic Financial Services Board (IFSB) today issues its 18th and 19th research papers in the Working Paper series. 

WP-18 empirically assesses the preliminary effect and implication of the abrupt and pervasive COVID-19 pandemic for the stability of the global Islamic banking industry. Data extracted from the IFSB Prudential and Structural Islamic Finance Indicators (PSIFIs) from 1Q 2018 to 3Q 2020 for eight jurisdictions is used for the analysis. Specific focus is on the quarter-on- quarter changes in five core prudential indicators: capital adequacy, asset quality, earnings, leverage, and liquidity. Findings indicate that while the Islamic banking sector across jurisdictions in the sample still records prudential indicators well-above the minimum regulatory and their historical average thresholds, preliminary impact of the COVID-19 pandemic is also observed across indicators and countries.

WP-19 investigates the operational activities and regulatory approaches relating to the Islamic banking digital transformation process across IFSB member jurisdictions. Specifically, this paper investigates the current status, technology adopted, and rationale for digitalisation among Islamic banks. The paper also investigates the regulatory approaches, challenges, prudential risks and the financial stability implications of digitalisation of Islamic banking. Findings reveal that most Islamic banks’ digitalisation process is still in progress but have gained more traction especially since the outbreak of the COVID-19 pandemic. Amongst many other pertinent reasons cited in the paper, strengthening competitiveness, enhancing operational efficiency, and improving customer satisfaction are the main rationale for IBs digitalisation drive. To achieve these, mobile and digital wallet, biometric authentication, and artificial programming interface are the main technologies adopted.

Regarding the WP-18, the Secretary-General of the IFSB, Dr. Bello Lawal Danbatta stated that, “notwithstanding uncertainty in terms of its effect and duration, it is pertinent that the preliminary implication of the COVID-19 pandemic for the stability of the Islamic banking industry is assessed. This is because while the policy response measures generally apply to both the Islamic banks and their conventional counterparts, there may be peculiar implications for the former due to among other factors the size and portfolio components of their balance sheet relative to the latter. It is from these concern that the paper is derived” he further added.

Dr. Bello stated that “the WP-19 describes the views of Islamic banks about their digital transformation processes, drivers, and challenges. He noted further that digitalisation is indispensable for Islamic banks if they want to enhance their competitiveness by broadening outreach, exploring new horizons, identifying untapped potentials, and unlocking opportunities. The paper also stated the implication of both the benefits and risks of digitalisation for the stability of the Islamic banking industry as well as recommendations on way forward” he further added. 

WP-18 and WP-19 are available for download from the IFSB website: www.ifsb.org

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