Islamic liquidity body to create key tools-bankers

* Lack of liquidity instruments challenge to industry

* Islamic finance industry still developing capital market

* Central banks plan Islamic bond issues

By Frederik Richter

MANAMA, Nov 24 (BestGrowthStock) – A new Islamic liquidity
management company backed by central banks will provide sound
tools to the industry to manage cash, of which regulators will
force banks to set aside more post-crisis, bankers said.

The Islamic Financial Services Board (IFSB), an association
of regulators in Muslim countries, said in October it would set
up the International Islamic Liquidity Management Corporation
(ILM) to issue short-term instruments compliant with Islamic law.

The ILM may issue highly rated Islamic bonds, or sukuk, that
will be backed by central bank assets as early as next year to
help Islamic banks manage their liquidity and create a liquid
cross-border market for Islamic instruments. [ID:nLDE6AM15Z]

While the ILM is still hammering out the details, Islamic
bankers say it greatly improves the industry’s prospects that
have been clouded by the lack of liquidity management tools.

“(We need a) readily manageable liquidity platform in the
capital markets space and with the Basel III liquidity
regulations coming we have to pay even more attention to these
issues,” said Richard Thomas, chief executive of UK-based
Gatehouse Bank.

Bahrain and Malaysia have the only central banks that
regularly issue sukuk and bankers said the ILM could be a
vehicle for other central banks that have hesitated issuing
sukuk on their own due to political reasons.

“If you want to issue sukuk as a central bank and you have
the political willingness of doing so you can do it, like
Bahrain has been doing it for many years,” said Lilian Le
Falher, executive manager at Kuwait Finance House Bahrain.

“Maybe having a proxy like the ILM will help (more central
banks to follow),” he said.

NO ALTERNATIVES

Currently, Islamic banks are often forced to place the
reserve liquidity they need to maintain under central bank
requirements with international conventional banks through
another Islamic money market tool, commodity murabaha, as there
are not enough highly rated sukuk issues they could use instead.

But most Islamic scholars say commodity murabaha is a mere
paper trail replicating conventional money market instruments
and only grudgingly accept its use as there is no alternative.

“There is a desire within the industry to rely less on
commodity murabaha and to have different tools to be able to do
liquidity management,” said Simon Eedle, head of Islamic banking
at Credit Agricole CIB (CAGR.PA: ).

Islamic bankers face the dilemma that scholars call for
their instruments to be underpinned by real assets, but central
banks often do not qualify these as being sufficiently risk-free
to be used in short-term liquidity management instruments.

The initiative by the ILM could be a way out, but bankers
caution the costs of truly backing the sukuk issues with assets
could make that more costly.
“The main problem we have in Islamic liquidity management is
that in a low short-term profit rate environment, it makes it
very difficult to do any products based on real assets as the
cost of doing so will make the product commercially not viable”,
said Le Falher.

(Click on [ID:nISLAMIC] for more Islamic finance stories and
(ISLAMIC: ) for a speed guide)

Islamic liquidity body to create key tools-bankers