Basel Iii: Impact and Challenges to Islamic Financial Institutions: Evidence of Pakistan and Malaysia

The global financial crises 2007 bring about the current banking regulations which stood inadequate to avoid banks from taking in unnecessary risk actions. Therefore, Bank for International Settlement (BIS) and G-20 leaders endorsed a new international standard of banking regulations by revising previous Basel II rule, introduced in 2004, into Basel III in late 2010, so as to enhance the quality including quantity of capital, leverage ratio and liquidity standards, which has become a challenge for nationals to implement these strict reforms under their existing banking system. Parallel with the conventional banking system, for which the Basel Committee formulated Basel framework, Islamic banking introduced in early 1977 to 1980 in Pakistan in response to the decision by the Shariat Bench of Supreme Court, necessitates that the financial system be transformed to operate in conformity with sharia. The State Bank of Pakistan (SBP) and Bank Negara Malaysia are the regulator of Islamic banks and full member of IFSB. The Islamic Financial Services Board (IFSB) established in 2002 in Malaysia as an international standard-setting organization to enforce the international regulatory and supervisory guidelines for Islamic financial organizations along with other standard setting bodies such as AAOIFI and ISDB to achieve this objective. The IFSB promotes the stability and soundness of the Islamic financial institutions by issuing guiding standards and prudential regulations for the industry, The IFSB applied Basel standards in the context of Islamic banks and its operating models. This paper critically evaluates Islamic financial institution’s regulatory and supervisory structures particularly for Pakistan and Malaysia and examines financial position after implementing Basel Accord rules. Study suggests a positive impact in case of both countries.

The Determinants of Stock Market Development: A Panel Study of Developed, Emerging and Frontier Markets

The objective of the present study is to find the determinants of equity market development with a panel data of Developed, Emerging and Frontier Equity Markets. The determinants of equity market include both the quantitative and qualitative factors, whereas the former represents the macroeconomic variables, and the later embodies the governance variables. The study incorporates the panel data set of world stock markets of 70 countries, which are classified by international group of Financial Times Stock Exchanges (FTSE) in three main regions of the world as Developed (25), Emerging (21) and Frontier (24) Equity Markets and period of the study is 20 years starting from 1996 to 2015. Given the panel nature of the data, the econometric methodologies of dynamic Generalized Methods of Moments (GMM) has been incorporated to find the significant relationships on subject matter Moreover, the study has incorporated multifaceted statistical methodologies in all three regions of the world stock markets. Despite having different dynamics and resources, there are few similarities but there are some of the stark differences, which lead them to identify their uniqueness. The study finds that effects of economic and governance factors on stock market development are peculiar in nature and quite unique as per the dynamics of that particular region. For instance, the study finds that economic and governance factors are more influential in developed region as compared to emerging and frontier regions which is mainly due to strong institutional quality in the developed countries. The study has formed a composite index of Economic and Governance factors through Principal Component Analysis by using factors for each region of the world equity markets. Afterwards, cross-index of Economic and Governance Factors is formed for exploring the joint effects of these variables. The study reveals that there is strong correlation in these composite indices in the developed region, where as there is no clear pattern in the developing countries. Moreover, there is quite dispersion in the composite data of the developing countries. So, there is no direct correlation in the composite factors of economic and governance in the developing countries. The studies on exploring the direct effects are quite in abundance but the literature on indirect and cross effects of governance and economic factors on the development of stock market are quite scarce. The present study explores the comprehensive direct and indirect effects of governance factors as well as vice versa effects on the development of economy and equity market in all regions of the world equity markets. After the estimation, the study finds that effects of economic and governance factors on stock market development are not only unidirectional, but also bidirectional as well. Particularly, the emerging markets have dual effects on economic and governance factors. The indirect effects of governance through economic factors are significant in developed region and cross effects of governance and economic factors are significant in emerging markets. The vice versa effects of stock market development and economic growth suggests that economic growth is also affected by the development of stock market and governance factors particularly in frontier markets. The reverse impacts of stock market development on the economic growth are quite captivating in which development of stock market also affects the growth of economy in all three regions of the world. In the end, the study recommends that determinants of equity market may not solely based on economic factors rather the significance of governance factors may be taken into account while taking the complete picture of the subject. This study will append the knowledge of prevailing institutional works on equity markets and economy as well. Moreover, the formation of composite indices for governance and economic factors for all the regions of developed, emerging and frontier markets may append the existing knowledge database of financial markets.