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The Need for Short Term Islamic Liquidity Management Instruments

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It is important for Islamic banks to have sufficient funds to deal with its obligations or commitments that may also affect its capability to attract deposits. Like conventional banks, even for Islamic banks, there should be a proper mechanism put in place to match the maturity of assets and liabilities daily while managing with any short-term pressures that may trigger in the course of assuring the assets are fully funded. Unlike conventional banks, Islamic banks in some jurisdictions does not have Islamic short-term liquidity management instruments available in the domestic market as the only available financial instruments are conventional financial instruments tainted with riba. This means that the money market instruments including the interbank market financial instruments and the Central banks acting as lender of last resort in those jurisdictions are typically designed with a loan transaction with interest which is fully prohibited in Islamic finance.

 Liquidity Issues Faced by Islamic Banks

Due to lack of availability of Islamic liquidity management instruments in the domestic market, Islamic banks may face and deal with excess liquidity. This is a situation where the liquid assets of the Islamic banks are either producing a very low return or no return at all threatening the business sustainability of the Islamic banks adversely affecting the competitiveness of the Islamic banks compared to conventional banks. Like conventional banks, Islamic banks are required to follow capital adequacy requirements under Basel norms. For instance, even the Islamic banks under Basel III are supposed to increase the amount of high-quality liquid assets (HQLAs) they hold to ensure that they have the ability to meet the liquidity coverage ratio (LCR). In this regard, the main obstacle which the Islamic banks face is not having enough supply of HQLAs. The undeniable truth is that since the inception of Islamic banking, Islamic liquidity management is a challenge and even today, only limited instruments are available in some selected jurisdictions. The most popular type of investment used by Islamic banks to address the problem of liquidity is commodity Murabahah which is a form of a short-term finance based on Tawarruq. However, the latest practices of the countries prove that there are innovate solutions used in product structuring to manage liquidity.

Differences between Conventional and Islamic Short-Term Liquidity Management Instruments

The main difference between conventional and Islamic short-term Islamic liquidity management instruments is that in Islamic short-term liquidity management instruments, there is no involvement of riba. This means that there is no loan relationship created with interest payment obligation in Islamic short-term liquidity management instruments as there is always an underlying asset or a real economic activity that derives halal profit in the mechanism. To structure an Islamic short-term liquidity management instrument, the shariah contracts are used. For instance, in 2001, the government of Bahrain introduced short-term Al-salam Sukuk to provide investment opportunities for banks and to facilitate monetary policy activity by the Central Bank paving way for Islamic banks to engage in monetary operations. How this Al-salaam Sukuk works is that the government agrees to sell forward to Islamic banks a commodity, typically aluminum in the case of Bahrain, against a spot payment. Instantaneously, the Islamic banks appoint the Bahraini government as their agent to sell the commodity to a third party upon delivery. The price of the future sale determines the return of the Sukuk, and the initial spot payment from the Islamic banks to the Central Bank is considered as the liquidity withdrawal.

 Conclusion

To manage the liquidity of Islamic banks, short term Islamic liquidity management instruments play a vital role. As such, for the sustainable development of Islamic banking, it is imperative to have innovative short-term Islamic liquidity management instruments offered in the domestic market. In this regard, the regulatory authority of Islamic banks could play a vital role to establish a vibrant and resilient Islamic money market parallel to the conventional money market. This is a real challenge faced by the Islamic banking industry of Maldives as well. In 2011, when Maldives Islamic Bank, the only full-fledged Islamic bank was opened in the country, the most critical challenge it faced was to find adequate Islamic liquidity management

instrument in the money market and the capital market and this issue has been highlighted by the Chairman of board of the bank in the bank’s Annual Report 2011 (p.11) as follows:

The bank has gradually deployed the funds towards providing Shariah-compliant financing to its customers under the concept of Istisna’, Murabahah and Ijarah. I wish to highlight, however, that a significant portion of the deposits has to be placed in a nonearning account with the Maldives Monetary Authority due to the absence of Shariah compliant money market and capital market instruments locally to invest in. Finding a viable and acceptable avenue to invest our surplus funds is one of the biggest challenges we face, not only for generating income but also equally important for liquidity management.

Dr. Aishath Muneeza is an Associate Professor at the International Center for Education in Islamic Finance. 

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UNCHR has urged the international community to continue engaging with the Taliban

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Filippo Grandi, the United Nations High Commissioner for Refugees (UNHCR), stated today that the international community should continue to engage with the Afghan Taliban.

On a news conference Friday during his tour to Pakistan, the UN official stated that the UNHCR is working with the temporary Taliban administration in Afghanistan on humanitarian issues and urged the rest of the world to do the same.

“The Taliban emphasized a desire for humanitarian assistance to be delivered to the country as soon as possible since, as we see ourselves, things are extremely challenging.”

He stated that Afghanistan has been in severe need of financial assistance and that as time passes, the situation will worsen “Everything is required because the situation is dire. Food, medication, housing, and other basic requirements are required.”

He stated that the UNHCR will be able to expand up humanitarian assistance if it is sufficiently supported and resourced.

“It is critical that the international community establish the required direction (and) methods to maintain Afghanistan’s functioning. If public services, such as health care or education, fail and the state fails to operate, it would cause a much worse disaster than a humanitarian crisis.”

When asked about the fresh wave of internally displaced persons in Afghanistan, he stated that roughly 500,000 people had lately been displaced by violence due to fighting in their communities. There is, however, no migration of refugees into neighboring countries, notably Pakistan.

He praised Pakistan for facilitating humanitarian efforts in Afghanistan, stating that he received some relief trucks from Pakistan during his visit to Afghanistan.

“Whether it is Pakistani or international donations going through here, we will need to use Pakistan to fly people in and out, as usual, Pakistan will play a very crucial role of assistance to the humanitarian activities within Afghanistan, and I am very happy for that.”

 

Source: Xinhua News Agency

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During the Mid-Autumn Festival holiday, China anticipates 40 million domestic trips

Adam Layaan Kurik Riza

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According to the China State Railway Group Co., Ltd., 40 million domestic journeys are expected in China during the four-day travel rush for the Mid-Autumn Festival holiday.

According to the firm, passenger trips are projected to peak on Sunday, the opening day of the three-day Mid-Autumn Festival holiday, with 11 million trips estimated on that day.

The railway passenger flow is likely to return to last year’s levels, according to the business, citing bookings made on 12306.cn, China’s official railway ticket reservation website.

The Mid-Autumn Celebration, which takes place on September 21 this year, is a traditional festival that represents family reunions.

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Global automakers and experts appeal for NEV collaboration

Adam Layaan Kurik Riza

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To attain the aim of carbon neutrality, major global automakers and experts have advocated for more extensive collaboration in the field of new energy vehicles (NEVs).

Speaking at the 3rd World New Energy Vehicle Congress (WNEVC), international participants stated that because China is the world’s largest auto market, they are eager to collaborate with Chinese partners to combat climate change and create a more beautiful world.

The three-day event, titled “Comprehensively advancing marketization, accelerating cross-industry integration, and collaboratively achieving carbon neutrality,” was held from September 15 to 17 in Haikou, the capital of south China’s Hainan Province.

British Trade Commissioner for China John Edwards said he urges more Chinese companies to seek collaborative opportunities with the UK and assist develop the battery and new energy vehicle markets.

“China and the United Kingdom both have extensive plans for zero-emission vehicles. I am confident that by exchanging ideas and working together, such as at this event, we can accelerate innovation and create a successful environment for meeting our zero-emission car goals “According to Edwards.

BMW, a business that has been active in the Chinese market for decades, has declared its support for China’s green transformation.

By cooperating with Chinese enterprises, the German manufacturer claimed it will deliver more zero-emission vehicles for the Chinese market and extend the number of public charging stations. BMW is forming partnerships with Chinese digital behemoths to assist startups in technological innovation, according to BMW Chief Development Officer Frank Weber in a video speech.

ZF, a global auto-system supplier, has established roughly 50 manufacturing businesses and four R&D centers in more than 20 Chinese cities.

Holger Klein, a member of ZF Group’s management board, stated that the company will continue to improve its innovation and development capabilities, as well as promote digital manufacturing for the Chinese NEV market, in order to contribute to China’s sustainable development and next-generation mobility.

Noting that China is the world’s largest market for electric vehicles, Hans Georg Engel, senior executive vice president of Daimler Greater China Ltd., stated that the company will establish an R&D center in Beijing with over 1,000 engineers and will continue to invest in China to improve its research capabilities.

Daimler, in particular, will focus on the research and development of electric vehicles and battery technology in order to give personalized goods to Chinese consumers, he added.

According to Liu Yunfeng, vice CEO of Volkswagen Group China, the German carmaker Volkswagen wants to create 17,000 high-power charging sites in China before 2025 and 32,000 by 2030, emphasizing that reaching carbon neutrality takes work from every country around the world.

Carlos Manuel Rodriguez, CEO of the Global Environment Facility, reiterated Liu’s views, urging intense cooperation in terms of technologies and markets to aid the development of the NEV industry in developing nations.

 

Source: Xinhua News Agency

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