Introduction

This chapter examines the fundamental principle of bank capital and the necessity for banks to maintain capital. It examines the supervisory capital framework and provides a knowledge of how to interpret the amount of capital required by the regulator. Fundamentally, the role of capital is to act as a cushion against unforeseeable future losses that a bank may experience. Banks keep capital not only to withstand adversity but also because it affords them financial flexibility. The ever-increasing interdependence of Islamic banking systems in the global capital market and the inclusion of additional emerging market participants as active participants have compelled Islamic banks and supervisors in numerous jurisdictions to strengthen capital levels.