Central banks to cooperate on Islamic liquidity management

Taking advantage of the international audience at this year’s Global Islamic Finance Forum (GIFF) in Kuala Lumpur, Bank Negara on Monday hosted the launch of the International Islamic Liquidity Management Corporation (IILM).

Although driven by Malaysia, this is a collaboration of 11 central banks from across the world, including Bank Negara, and two multilateral organisations.

The corporation’s aim is to assist institutions offering Islamic financial services in addressing their liquidity management in what was described as “an efficient and effective manner”. The initiative is expected to facilitate greater investment flows for the Islamic financial services industry.

Once it is fully operational, the IILM is expected to issue high-quality Shar'iah-compliant financial instruments for both national implementation and cross-border. However, as a number of specialists noted at this year's GIFF, before any issuance can take place, there needs to be a broader consensus reached on global standards.

This is another issue entirely, and one which has been debated and bantered among practitioners and academics since the development of global Islamic financial markets. However, of more immediate interest at the GIFF yesterday -- prompted by the launch of the IILM -- was finding solutions for the long-standing problem of liquidity management.

“The issue of liquidity is alien to Islamic finance,” voiced Rafe Haneef, managing director of global markets at HSBC Amanah. “According to Islamic law it is supposed to be liquidity neutral,” he said.

However, with the rate of growth in the market, there is a large amount of liquidity accumulating – a situation at odds with how Islamic finance ought to be practiced in theory. Therefore, there is an increasing need for Islamic financial institutions to find banks with larger capital bases that are able to consume the counterparty limits required to support this growth.

“The Islamic banking system is still small and hence it is not able to absorb all the liquidity in the Islamic banking markets,” explained Haneef.

The idea is that IILM will absorb some of this excess liquidity in the future, but how that is to be done is still very much a work in progress.

“We have not seen a situation where there has been a serious crisis hitting the Islamic finance market and this poses a lot of risk,” expressed Kamarul Ariffin Mohd Jamil, chief executive officer of Affin Islamic Bank.

More importantly, how to regulate this from an asset liability perspective and a liquidity management perspective is far from being defined. Whether this would be a task for the IILM is still unclear as the lines between local jurisdiction and cross-border cooperation remain unclear.

A part of this lack of clarity can be attributed to the incongruity of each country’s development in relation to one another, which means they will have a different emphasis in their respective agendas. Where many are calling for a common approach to taxation of Islamic products, other jurisdictions, for example Saudi Arabia, are addressing consistency elsewhere.

Damian White, general manager for the treasury group at Al Rajhi Banking and Investment Corporation (Saudi Arabia), believes that part of the overall liquidity management equation is issuing term debt.

“Individually the banks need to focus on getting the treasury products approved,” he said. “Islamic retail banking in the Kingdom is very advanced and corporate banking is developing, but treasury is lagging behind and if we can’t address the issues, Islamic banking will struggle to go to the next level.”

The issues mentioned by White, Haneef and other Islamic finance specialists have been debated for years. “The issues we are facing are not new,” summarised Jamil. “There is a greater need for us to come up with a standard approach to liquidity management and I hope that eventually a common one will prevail,” he said.

More on IILM

Signatories of the IILM are governors and their representatives from the central banks and monetary authorities of Indonesia, Iran, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Saudi Arabia, Sudan, Turkey and the United Arab Emirates. The Islamic Development Bank and the Islamic Corporation for the Development of the Private Sector are the multilateral organisations participating in the initiative.

The IILM initiative was facilitated by the Council of the Islamic Financial Services Board.

“It is our hope that the establishment of this new entity in the Islamic financial services industry will support the ongoing efforts by the central banks and the monetary authorities to enhance the efficiency of institutions offering Islamic financing services in managing their liquidity.” professor Datuk Rifaat Ahmed Abdel Karim, said at the signing ceremony.

A memorandum of participation for the IILM was signed on October 7, 2010 on the sidelines of the IMF-World Bank annual meetings in Washington. The signing of the articles of agreement on Monday marks the official establishment of the IILM.

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