Risk-based supervisory framework for Islamic banks : a case study of Nigeria

Abstract

The study aimed at developing a (tailored) Islamic risk-based supervisory (IRBS) framework for Islamic banks in Nigeria in line with their unique specificities, in terms of their "unique inherent risks" and "unique risk management control functions". The fast-growing systemic importance of the Islamic banking industry in various jurisdictions around the globe warrants effective supervision that recognises their specificities. The new IRBSF gives a more accurate assessment of Islamic banks' health (risk profile) which ensures more effective risk-based supervision of Islamic banks in a bid to improving their safety and soundness to promote overall financial system stability. The methodology involved an in-depth content analysis of the current conventional (CRBS) framework in Nigeria to identify gaps and a further interview of twelve experts to obtain expert opinions in developing the new framework for Islamic banks in Nigeria. The interview results were coded and analyzed with Atlas Ti-8. The study found that the unique key inherent risks of Islamic banks for the new IRBS framework are Shari’ah non-compliance risk, Equity Investment risk and Rate of Return Risk and the unique risk management control functions of Islamic banks are Shari’ah Board (SB), Shari’ah internal audit function (SIAF) and Shari’ah compliance or review function (SCF). The expected contribution of the IRBS Framework proposed by this research is that regulators will be better equipped to manage Islamic banks’ fragility based on their specificities and promote the overall safety and soundness of the financial system. The research will also assist Islamic banks improve their understanding and management of the unique risks inherent in their line of business (Islamic banking). This research further alleviates the current shortage of academic literature on the crucial regulatory subject of risk-based supervision in the Islamic finance industry.