Islamic Banking and the Impact of Capital Adequacy Regulation

This paper shed light on one channel that capital adequacy might be more effective in Islamic banks comparing to conventional banks. One reason that capital adequacy regulation has not been very effective during the recent years is the process of Securitization. Securitization is the process of pooling and trenching the banks’ assets and selling them to other financial institutions. Banks run this process to relax their credit constraint and what permits the bank to do it is their ownership over the assets in their portfolio. This is due to the nature of debt contracts in which the banks are the owner of all deposits. This doesn’t hold in Islamic banks considering their commitment to wikala which restricts their authority in running securitization. Therefore, wikala has a complementarity role for capital adequacy regulation.