The Islamic Financial Services Board’s (IFSB) revised capital requirements for Bassel III could help strengthen the Islamic finance industry, according to a recent Standard & Poor's Ratings Services report.

The report titled ‘Basel III Offers An Opportunity For Islamic Banks To Strengthen Their Capitalization And Liquidity Management,” sets out how Islamic banks will implement Basel III.

The IFSB is likely to release its guidance note on the parameters and calculation of the liquidity coverage ratio and net stable funding ratio in early 2015.

The introduction of a liquidity coverage ratio might address some of the industry's long-standing weaknesses, particularly the lack of high quality liquid assets (HQLA), said the report.

Mohamed Damak, S&P’s credit analyst, said: “Our base-case scenario assumes that there will be no major changes in Islamic banks' quality of capital, which we see as strong on average.

“At the same time, we believe that raising capital requirements through the introduction of new capital buffers will help to make the industry more resilient.”

These buffers will ultimately help Islamic banks to cope better with the cyclical nature of the economies of the countries in which they operate and major business activities.

The Basel III implementation will creates an opportunity for the industry to develop a new range of HQLA to address the chronic lack of such instruments, according to S&P.

Its implementation may also encourage highly-rated sovereigns and corporates to list their sukuk on developed and liquid markets to make them eligible for HQLA inclusion.

The implementation of Basel III will also test the treatment of profit sharing investment accounts (PSIAs) from liquidity and funding perspective.

PSIA holders are, in theory, obliged to share any losses, but this could increase their volatility and liquidity coverage requirements and reduce their role as stable funding sources.

Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). - TradeArabia News Service