The General Council for Islamic Banks and Financial Institutions (CIBAFI), the global umbrella of Islamic financial institutions, recently submitted its comments to the Basel Committee on Banking Supervision (BCBS) on the Discussion Paper titled "The role of climate scenario analysis in strengthening the management and supervision of climate-related financial risks". The Discussion Paper (DP), issued on 16th April 2024, was open for public consultation until 15th July 2024.

In its comments, CIBAFI thanked the BCBS for the opportunity to provide feedback on the discussion paper (DP) and shared insights from its member banks across 34 jurisdictions. The key points of CIBAFI's comments include:

One of the key issues raised by CIBAFI concerns the role and objectives of Climate Scenario Analysis (CSA). Beyond the four prudential objectives listed in the DP, CSA can help banks comply with regulatory requirements for climate risk disclosure and management, ensuring they meet evolving supervisory expectations.

Challenges in Applying CSA

CIBAFI highlighted several challenges and proposed solutions:

·         Methodological Variability

·         Data Availability and Quality

·         Incomplete Transmission Channels

·         Regulatory and Policy Uncertainty

·         Bank Data Systems

Additionally, Islamic banks, which are generally smaller on a global scale, may lack the resources to develop comprehensive scenario analyses independently and may thus rely on regulatory guidance.

Proportionality and Materiality

CIBAFI emphasized the importance of distinguishing between materiality and proportionality. While proportionality is often associated with the size and systemic importance of an institution, climate-related risks can be highly material even for smaller banks.

Usage-Specific Considerations

CIBAFI underlined different considerations for CSA objectives:

·         Risk Identification: Longer timescales (up to 30 years) are adequate for business planning and regulatory needs, using a wide range of scenarios, including extreme ones, to understand potential worst-case outcomes.

·         Strategic Planning: Extending the timeframe to 50 years may be appropriate to consider long-term trends and potential tipping points.

CIBAFI also mentioned that banks are using a mix of internally developed scenarios and those from established builders (e.g., NGFS, IEA). Some banks may face challenges in developing scenarios internally and thus rely on externally developed scenarios, including those provided by regulators.

Recommendations for CSA Enhancements

CIBAFI suggested several measures to improve CSA exercises:

·         Increased granularity

·         Integration of the latest scientific data

·         Transition risk analysis

·         Socioeconomic considerations

·         Scenario customization tools

·         Continuous updates

Novel Approaches for Supervisors

Finally, CIBAFI recommended three innovative approaches for supervisors to consider:

·         Dynamic Stress Testing

·         Machine Learning Models

·         Collaborative Scenario Development

Additionally, improving data enhancement, knowledge sharing, and leveraging advanced analytics tools can significantly enhance the effectiveness of supervisory exercises.

The organization remains committed to working with the BCBS and other stakeholders to ensure that the needs of the Islamic Financial Services Industry are adequately addressed in the ongoing development of supervisory and regulatory standards.