De­vel­op­ing Is­lamic Money Mar­ket

The Financial Daily - - MARKET SUMMARY -

Muham­mad Arif

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.

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