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The IFSB Issues Three New Research Working Papers

Date posted: 28 December 2022

28 December 2022, Kuala Lumpur - The Islamic Financial Services Board (IFSB) today issued the 24^th, 25^th, and 26^th research papers in the IFSB Working Paper series.

WP-24 focuses on forecasting the non-performing financing ratio in Islamic banking following the unwinding of the various financing repayment flexibility and moratoria introduced during the COVID-19 pandemic. The paper is based on data extracted from the IFSB Prudential and Structural Islamic Financial Indicators database for Islamic banking and analysed via the vector autoregressive model with exogenous variable and the vector error correction model with exogenous variable. Three groups of countries are identified. Group 1 includes jurisdictions where Islamic banks` credit risk is most likely to increase during the recovery stage. Group 2 represents the jurisdictions where full-fledged Islamic banks` NPF is relatively stable throughout the forecast period. Finally, Group 3 contains the jurisdictions where the full-fledged Islamic banks` NPF is expected to follow a downward trend. Based on the aforementioned results, policy implications are derived to ensure the stability of Islamic banks across the examined jurisdictions during the post-pandemic era. 

WP-25 focuses on the prospects, imperatives, and challenges of Islamic infrastructure financing. This paper posits that while the infrastructure gap remains a key global issue and particularly in jurisdictions where Islamic finance is practiced, there is a limited supply of Islamic infrastructure financing by the institutions offering Islamic financial services. This is despite the fact that the Islamic financial services industry continues to grow in significance in the global financial ecosystem. Based on content analysis, the paper explores pertinent issues in Islamic infrastructure financing and concludes by highlighting what roles the RSAs and the IFSB can play in bridging the infrastructure financing gap.

WP-26 focuses on the early experiences relating to the transition from LIBOR to Risk-Free Rates in some IFSB jurisdictions. Based on survey responses provided by market players and regulators, and views of key industry leaders and experts, the results show that the institutions offering Islamic financial services (IIFS) have low exposure to LIBOR. Specifically, LIBOR was used for foreign currency-denominated transactions, whereas local reference rates were utilized for domestic transactions. The paper also illustrates various policy measures that have been adopted by RSAs across jurisdictions enabling IIFS to mitigate major transitioning risks, as well as regulatory and supervisory challenges that have been triggered when transitioning from LIBOR to RFRs. Finally, the paper highlights additional challenges that regulators and standard setters in Islamic finance can address with the aim to strengthen the resilience of the Islamic banking sector. 

The IFSB Secretary-General, Dr. Bello Lawal Danbatta stated that “the issuance of the IFSB working papers address pertinent issues that relate directly to the resilience, as well as the role of the Islamic Financial Services Industry (IFSI) in the aftermath of the COVID-19 pandemic.” He stated further that “it is gladdening to note that the findings from the working papers indicate that in addition to a smooth transitioning from LIBOR, the IFSI is also forecast to have limited susceptibility to credit risk that may arise from non-performing financing as COVID-19 repayment moratoria are unwound. Finally, the imperatives of considering the capacity of the IFSI to also complement various infrastructural developments across jurisdiction via alternative Islamic private financing sources was highlighted,”

The IFSB Working Paper Series are available for download from the IFSB website, www.ifsb.org.