Risk Management and Capital Adequacy of Islamic Bank; Should IFSB Standard be Based on Basel?

Abstract

Risk management is essential part of health of Islamic Bank (IB) and the health of entire financial market. One important tools in risk management to avoid the failure of a bank is the capital held by the bank. Understanding the importance of risk management and capital adequacy, Basel Committee on Banking Supervision (BCBS) published several guidelines related with risk management and capital adequacy ratio. Given the differences in Islamic contracts used in Islamic banking, this essay will discuss whether or not it is appropriate for Islamic Financial Service Board (IFSB) to base its standards for risk management and capital adequacy on Basel standards.