Comparative Study of Assessment of Capital Adequacy Ratio (CAR) for Islamic Banks in Pakistan under Basel II and IFSB Formulae for Capital Adequacy

Basel II Capital Adequacy framework for banks aims at building a solid foundation of prudent capital regulation, supervision, market discipline, along with enhancing risk management and financial stability. However, as per the views of some practitioners and scholars it does not appropriately address the concepts used in Islamic finance (IFSB and IRTI). Accordingly, Islamic Financial Services Board (IFSB) which is the international standard-setting organization of the Islamic financial industry, issued standards on Capital Adequacy as IFSB-2 in December 2005 and IFSB-7 in January 2009 which are largely based on the Basel approach, with necessary modification and adaptation to cater for specific nature and characteristics of Shariah compliant products and services. This research paper analyzes the implications of implementation of Basel-II Capital Adequacy Requirements and IFSB Standards to Islamic Banks, and recommends proposals for developing a Capital Adequacy framework that better a