Impact of Adoption of Basel II on SIBL

In this case, I have found that a more accurate assessment of the impact on Social Islami Banks capital levels and bonds remains difficult, given different portfolio mixes as well as the expected reliance of SIBL on internal systems and risk models to determine risk-weights, rather than standard risk-weights. Thus, I have faced some significant limitations to assess the impact of adoption of Basel II by SIBL. And the limitations are: Lack of sufficient disclosures about banks portfolios and their future risk-weightings, since this will also depend on whether banks will use the standardized or IRB approaches. Lack of precise knowledge as to how operational risk costs will be charged. However, SIBL is expected to benefit from sharpening up some aspects of their risk management practices in preparation for the introduction of the operational risk charge. Lack of consistency, at least at this stage, as to how insurance activities will be accounted for the financial instruments of SIBL. However, as Basel II implementation started in Bangladesh from 2010, the impacts of adoption are not visible clearly yet. But, there will be some certain impacts. In the following those certain and some potential impacts are discussed. Improved Risk Management and Capital Adequacy Management One aspect that the staunchest critics of Basel II agree to is the fact that it will tighten the risk management process, improve capital adequacy and strengthen the banking system.

Impact on Customers For SIBL, Basel II is an internal management exercise that does not directly affect customers. However, there has been a good deal of talk about Basel II leading to greater risk-based pricing in loan markets, as it increases the difference in capital required between risky and safer lending categories. This could lead to riskier types of debt, such as consumer finance, costing more relative to safer categories such as loan to large corporate house. From 2010, management of the Bank decided to give preference to the client rated by ECAI. It also will extend its credit towards the good rated borrower. This scenario will bar the poor rated client to avail any loan.

Shorter Term to Maturity of Lending Both the Basel I and II, and Basel III accords have a preference for short-term lending. This is because of the ease in exiting the investment in case the situation turns adverse. Also the interest rates on short term will also tend to be lower further incentivizing such borrowings. For this reason, SIBL is trying to attract shorter term borrowing to get the benefits. This shall impact both the bank and ultimate borrowers because of the change in the interest rate term structure and the need for Asset and Liability Management (ALM).

Impact on Capital Flows Short Term lending will further increase the volatility of capital flows within Bangladesh, from one bank to another. If any negative event occurs at any point of the flow, people will get panicked. There would be a tendency to press the panic button at the smallest change in the situation, further deteriorating it, leading to crisis.

Higher Interest Costs Implementation of Basel II will force banks like Social Islami Bank to charge more interest to risky customer as it has to keep some capital for that loan. On the other hand, there are few good customers in Bangladesh, so every bank will want them as their customer. So, competition will increase and interest rate will fall for the well rated borrower.

The cost of SIBLas a local Bank of Bangladesh This is countrywide impact which will hit all the financial organization in Bangladesh. Developing countries like Bangladesh usually has lower sovereign rating. The lower ratings will reduce the availability of funds in the developing countries. This has the potential to deteriorate the situation in these countries leading to further recession. The reduced market access and high costs of funding will further impact the ratings of these countries leading to a vicious circle with each aspect feeding the other in a downward spiral. In brief, these are some of the impacts that are felt and will be felt in future as SIBL and other banks adopt Basel II.