Developing Islamic Money Market
The Islamic m o n e y market is integral to the functioning of the Islamic banking and financial system, firstly, in providing the Islamic financial institutions with the facility for funding and adjusting portfolios over the shortterm, and secondly, serving as a channel for the transmission of monetary policy.
In 2005, IFSB based in Malaysia constituted a task force to work on its modalities. From Pakistan Mr. Muhammad Arif Divisional Head of SBP at that time and later departmental Head represented in the Task Force for two years.
The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released draft guidance on liquidity management for Islamic banks and new standards for regulatory supervision, as the industry body tightens oversight of banking practices.
IFSB guidelines allow national financial regulators to have the final say on how they apply standards, but its prescriptive approach is gradually helping to harmonize practices across the industry's core centers in the Middle East and Southeast Asia.
The IFSB's guidance note on liquidity management aims to clarify the accounting treatment of Islamic deposits and defines the types of high quality liquid assets (HQLA) that Islamic banks can hold to meet regulatory requirements under the Basel III banking standards now being phased in around the world.
HQLA can range from cash and central bank reserves to Sukuk (Islamic bonds) issued by both sovereigns and corporate, subject to various haircuts, IFSB says.
Given the shortage of such instruments, the IFSB outlines three other actions which regulators can take to facilitate the industry: liquidity facilities from central banks, allowing banks to hold HQLA in international currencies, and widening HQLA criteria.
This would help Islamic banks meet Basel III liquidity coverage ratios that are being phased in from 2015 to 2019; a net stable funding requirement was to be implemented in 2018.
Regulators must also decide on the treatment of Islamic deposit holders, who must be classified as investors, as a liability to the bank, or as a mix that is partly risk- absorbent, the IFSB says.
Pakistan has brought 3 years Govt Sukuk amounting Rs 385.4 billion as of Oct 2018. Further it has decided to facilitate Islamic Banking industry in their liquidity management and more effective transmission of monetary policy. For that SBP has decided to outright purchase or sale Government of Pakistan Ijara Sukuk (GIS) either on deferred payment basis (Bai-Muajjal).Technically it is a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments.
Now finally there is no other opinion that Islamic Banking in Pakistan is still standing on perception and not on innovations and new techniques. The main responsibility in this regard lies on SBP. For Islamic Money Market development the main emphasis should be on Research and Sharia Compliant side. It has been seen that most of the Treasurers in Islamic Banks use conventional methods for their liquidity management. This is absolutely wrong. Secondly SBP should focus on bringing complete legislation for Islamic banking. Moreover Hybrid instruments (mix of debt and non-debt based instruments) with short term period be brought in. Pakistan does have an experience of Short term Federal Bonds for 3, 6 and 12 months floated in some period of 1990-2000 where markup was allowed on par value. The same model can be adopted in these cases. For liquidity injection Musharkah model can be adopted being used in Export Refinance Schemes. One must remember that in Indonesia and Malaysia they work with Islamic and conventional Banks on clean basis i.e. without collateral, but in Pakistan SBP work on collateral basis. So we have to change our techniques a lot in case of Pakistan.