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The IFSB Issues Working Paper on Intersectoral Linkages in the IFSI

Date posted: 31 May 2019

Kuala Lumpur, 31 May 2019 – The Islamic Financial Services Board (IFSB) today issued its 11th research (WP-11) in the IFSB Working Paper series which explores the inter-sectoral linkages within the Islamic financial services industry (IFSI) and between IFSI and the real sector via a financial network analysis. The paper extracted Islamic banking balance sheet data covering 4Q13 to 4Q17 from the IFSB Prudential and Structural Islamic Financial Indicators (PISIFIs) database for generating a bilateral exposure adjacency matrix that indicates assets and liabilities across sectors of the IFSI and the real economy.

The Secretary-General of the IFSB, Dr. Bello Lawal Danbatta stated, “attempts to understand the systemic risk origination, propagation and mitigation relating to sectoral linkages has rarely focused on the specificities of the Islamic financial services industry (IFSI)”. “This preliminary paper is a modest attempt to fill this gap. It also underscores significance of the IFSB PSIFIs database from which data have been extracted to generate a bilateral exposure matrix used in the paper’s modest financial network analysis and visualization. The preliminary indicative outcome is envisaged to prepare the ground for future work by the IFSB on macroprudential guidelines as it applies to the specificities of the IFSI” he further added.

The results obtained did not show the anticipated significant commonality across countries that would enable a strong (albeit descriptive) conclusion to be drawn. The results did, however, indicate what financial network analysis could be done if the requisite data were available. While some inexplicable results were noticed, in general, all seven sectors studied across the four selected jurisdictions have increased in interconnectivity over time. Both the other financial institutions and household sectors recorded increased bilateral exposure in terms of obligations to other sectors. Notwithstanding, the results indicated a reduced likelihood of the Islamic banking sector creating a devastating effect on the financial network in the event that a systemic risk originated from it.

WP-11 is available for download from the IFSB website: www.ifsb.org

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