New framework needed to protect banks

Dr Nasser H Saidi, left; Jamie Farmer, centre, Senior Director Operations and Exchange Relations, Dow Jones Indexes; and Sumeet Nihalani, Senior Director Asia-Pacific and Middle East, Dow Jones Indexes; at a panel discussion in Dubai. (SUPPLIED)

The collapse of global conventional banking and financial system is due to the failure of Basel-II and there is a need for a new framework on Basel-III to strengthen financial system and avoid unforeseen crisis, said an official of Dubai International Financial Centre Authority (DIFCA).

"Basel-II and self-regulation have totally failed. Basel-II is not going to address the challenges in the crisis being faced by the global banking sector. We need a new paradigm and looking at Basel-III framework to make a fool-proof mechanism that protects the banking industry during the times of crisis," said Dr Nasser H Saidi, Chief Economist at DIFCA.

"Generally we look towards raising capital adequacy ratio (CAR) during good times and lowering in bad time, but it's not sufficient. The scope for regulation, liquidity market framework should be strengthened. We should develop early warning indicators. We need Basel-III framework in 2009 and key factors such as risk management, liquidity management, CAR need to be incorporated in the new guidelines," Saidi said at a panel discussion to discuss "Economic and Islamic Finance Outlook" for the UAE and the region.

He emphasised that Islamic finance has been resilient to financial contagion and crisis and estimated that global Islamic finance industry would be $3.5 trillion (Dh12.8trn) in next five years from the level of $840 billion in 2008 and $729bn in 2007.

"This is perfect timing for the governments to start using the support of Islamic finance instruments, public finance and Sukuks for financing infrastructure and public works.

"The governments need to increase spend to create jobs and should compensate the gap left by the private sector. In this regard, the UAE Government is proactive," said Dr Saidi.

Cautioning about the likely impact of drop in oil prices, Dr Saidi said that if the price continues to fall, the current account of GCC would slips into negative zone. The region may see a loss of $50bn to $100bn from the existing $300bn surplus mark.

Answering a question on when will the market stage a recovery and what are the factors needed for it, Dr Saidi said: "About 60 per cent of world economy comes from the emerging countries. Asia and GCC contribute more than 40 per cent of global output. To see the recovery in the global economy, China should continue to grow at seven per cent to eight per cent and this needs to be supported by GCC and other Asian majors."

 

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