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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 (Reuters) - 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. Learn more Islamic Bonds: Your Guide to Structuring, Issuing and Investing in Sukuk
Source : Reuters.com
