Managing Islamic Deposit Insurance in a Dual Banking
System: the Malaysian Experience
Dato’ Mohd Razif Abd Kadir
Deputy Governor
6th IADI Annual Conference
1 November 2007
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Outline

Financial Safety Net

The Need for Islamic Deposit Insurance

Islamic Deposit Insurance Model

Issues & Challenges
2
Main Components of Financial Safety Net
Need to maintain financial stability for sustainable economic growth
Financial
Stability
Depositors’
Protection
Robust & Sound
Banking System
FINANCIAL SAFETY NET
Prudential
regulation &
supervision
Lender-oflast resort
Intervention
& resolution
mechanisms
Deposit
insurance
system
3
Malaysia’s Islamic Financial System…the journey

The journey:
1st Islamic
bank
Tabung Haji
M’sian
Islamic
Financial
Centre
1st takaful
company
New takaful
& retakaful
company
Islamic
window
Foreign
Islamic
banks
Islamic
money
market
Islamic
subsidiary
Financial
Sector
Master
Plan
Islamic
capital market
Strong Growth of Islamic Banking Assets…
140
120
2000-2006: average
annual growth 18.8%
RM billion
100
80
60
40
20
0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Introduction of Islamic banking window …

Instituted comprehensive Islamic financial system with diversity of players & wide range of products supported
by robust legal, Shariah & regulatory framework, has effectively establish a viable dual banking
system…
ISLAMIC BANKING &
Source: Bank Negara Malaysia (BNM)
FINANCE IN MALAYSIA
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Need to have Islamic deposit insurance system to maintain sustainability of Islamic
financial system & overall stability of financial system…
Islamic banking operating parallel with entrenched conventional banking…
Depositors
Implicit guarantee
Government
Target same
customer pool
Islamic
Banking
Implicit guarantee already in
place before introduction of
deposit insurance system…
Conventional
Banking
In introducing explicit deposit insurance system, do we
have a choice to exclude Islamic deposits? No!


Financial safety net* as necessary
condition for doing business & to
maintain financial stability for economic
growth - instill public confidence
No compromise on financial stability –
avoid systemic risk
* Including deposit insurance system

Islamic banking must be as competitive
vis-à-vis conventional banking

Need separate Islamic deposit insurance
operating parallel with conventional
deposit insurance – in accordance to
Shariah principles
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Mechanism for Deposit Insurance Funds
DEPOSITORS
Guiding Principles:
DEPOSITORS
 Minimise
Deposits
MDIC funds provided for:
i. Immediate payment to
FINANCIAL INSTITUTIONS
FINANCIAL
depositors of non viable
INSTITUTION’S banks; and
FAILURE
ii.Facilitate resolution of
troubled banks
Contribution
(premium)
duplication of
functions/ regulatory
requirements – least cost
resolution
 MDIC
is independent but
close co-operation & coordination with BNM on
regulation & supervision
 Costs
borne by banking
system – through contribution
(premiums)
MDIC
system – Islamic
deposit insurance operates
side by side with conventional
deposit insurance under
MDIC
 Equitable
Assessment
& resolution
FUND
INVESTMENT
• Islamic Fund
• Conventional
Fund
BNM
 MDIC
may seek
credit from
government for
temporary liquidity
 MDIC
will repay to
government via
adjusted premium
rate
GOVERNMENT CREDIT
FACILITY
BNM - Bank Negara Malaysia; MDIC – Malaysia Deposit Insurance Corporation
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Rationale on insurance coverage of mudharabah deposits…
As prudential measure with overall
objective of promoting integrity & stability
of banking system (“Maslahah” –
public interest)


Mudharabah deposits* – (49.2% of
total deposits)

If mudharabah deposits are not
covered while conventional banks are
covered by deposit insurance, it may
expose to systemic risk

MDIC will provide insurance
coverage only in the event of bank
failure

Under normal course of banking
business, depositors expose to the
risk of losing their capital –
consistent with concept of
mudharabah
Rationale

Current practice, mudharabah deposits
(general investment account - GIA)* are
managed & behave similar to “near
deposit” rather than pure investment

Not fully recognised mudharabah
deposits as risk absorbent for
Islamic banks

Deposit insurance covered by 3rd party
guarantee not by bank itself


MDIC will provide 3rd party
insurance coverage (consistent with
Shariah principles)
Mudharabah deposits has lower priority
of payments than Wadiah deposits
In future, continuous assessment - to ascertain insurability of mudharabah deposits
* Main types of mudharabah deposits - General Investment Account (GIA) & Specific Investment Account (SIA)
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Interrelationship between BNM and MDIC
Guiding Principles

Transparency in presentation of the issues

Accountability of each organisation for areas within their mandate

Timely and clear communication

In resolving conflict of interest issues, the overriding goal shall be the stability of
financial system

Respect & valuing the diversity of experience that both organisations would
bring to the discussion table
Mechanism

Governor as an ex-officio member in MDIC’s Board of Directors

Guide to Intervention outlines the intervention processes to be applied to
member institutions by BNM and MDIC

Strategic Alliance Agreement sets out areas resources & information sharing

Liaison Committee to identify issues for co-ordination and resolution

Regular meetings to resolve bilateral issues
BNM - Bank Negara Malaysia; MDIC – Malaysia Deposit Insurance Corporation
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Islamic Deposit Insurance Model
3. Provide insurance coverage
when bank fails (3rd party
guarantee)
1. Deposit money
Depositors
Islamic
Banks
2.
Contribution (premium)
based on Tabarru’
Separation & equitable treatment principles
Separate management
of funds
 Funded
by contribution
(premium) collected from
Islamic banks
 Pooled
contribution
(funds) managed
separately
 Invest
in Shariah
compliant instruments
Equivalent Coverage Limit
 Islamic
deposit covered
separately from conventional
 All
coverage limit -similar to
conventional
 Up
to RM60k per depositor
per member institution
 Covers
90% of total
depositors*
Separate Premium
Assessment
 Separate
deposit
premium assessment
system for Islamic &
conventional
 Separate
supervisory
assessment for Islamic
& conventional banking
institutions (incl.
windows)
Separate Payout
 Separate
payment in
event of failure
 Islamic
deposit
insurance funds used
only for Islamic banks
 Deficit
contribution - can
raise funds from
government based on
Shariah principles
Dedicated Deposit Insurance Act covers provision on Islamic deposit insurance
* Based on BNM Survey
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Issues and Challenges

Should risk premium assessment
methodology be different from conventional
banking?

Should premium assessment on Islamic
windows be separated from their parent
conventional banks?

Absence of guiding principles on Islamic
deposit insurance
 Operation
and establishment of
Islamic deposit insurance scheme
 Collaboration
& cooperation between
Islamic Financial Service Board
(IFSB) and International Association
Deposit Insurers (IADI) Committee
 To
address distinct features / structure
of Islamic banking
 Consideration
on profit sharing
investment account as risk absorbent

Limited avenue for investment on
Islamic financial instruments

Demand exceed supply

Need for continuous innovation

Liquidation of assets in event of bank
failure

Cross border liquidation of assets globalisation

Priority of payments of new
contracts applied to deposits (e.g.
wakalah, musharakah contracts)

Actual liquidation process (e.g.
liquidation of assets funded by
specific investment accounts)
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THANK YOU
6th IADI Annual Conference
1 November 2007
Mission
A vibrant, innovative and competitive international
Islamic financial services industry in Malaysia, supported by high calibre human talents,
world-class infrastructure and best international standards
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