CAMELS Rating System in the Context of Islamic Banking: A Proposed ‘S for Sharia Framework

Paper
Date Published: 
Jan 2008
Author: 
Sarker, A.

Reviewing standards for off-site supervision of banking institutions

This paper reviews the CAMELS standards for off-site supervision of banking institutions, and their compatibility with an Islamic setup. It puts forward a Sharia Matrix to elicit comments and suggestions from Sharia experts and expert Islamic bankers.

Islamic banking has existed in Bangladesh for more than two decades, and is growing rapidly. Yet, Islamic banks in the country continue to be supervised according to the secular supervisory and regulatory systems that are used for traditional banks and financial institutions. The paper sates that:

  • Lack of enforcement and supervision in line with Islamic Sharia may lead Islamic banks into systemic Sharia distress;
  • Existing rules, regulations and guidelines with respect to Islamic banks are inadequate;
  • Similar supervision for conventional and Islamic banks does not take into consideration the peculiar characteristics of Islamic banks. 

Finally, central banks should develop specific rules and regulations to ensure soundness of Islamic banks’ financial and operational conditions. Sharia compliance is important to ensure the confidence of clients in an Islamic bank. An Islamic bank could fail as much due to non-compliance with the Sharia as for financial imprudence.

Type: 
Paper
Region: 
South Asia
Country: 
Bangladesh