Despite liquidity management being the core of any robust financial system, it is ironic that the Islamic finance industry is sorely lacking in this department. “There are no cross-border liquidity products existing today which are truly Shariah compliant. Without liquidity instruments, you cannot have a healthy and systemically safe financial system. Liquidity is indispensable; and it is a significant shackling for the Islamic financial system to not have liquidity instruments that are cross-border in nature. We need cross-border products because financial institutions are globally linked, and the demand for this is enormous,” revealed Hooman Sabeti, a partner at Allen & Overy, at this year’s Islamic Finance news Asia forum.
There are currently more than 25 liquidity management instruments available globally, but more than 70% are commodity Murabahah-based; except in Sudan and Iran. However, there is definitely demand for liquidity management products, as revealed by a GCC-based industry player: “One of the things we would like to see is an instrument that is flexible and allows customization to be compliant with the Shariah board, as well as deal documents that can accommodate regulatory issues in the jurisdictions that we serve. Our clients are interested in dealing in highly rated, highly qualified, very strong financial institutions,” he said.
Recently, the Islamic Interbank Benchmark Rate (IIBR) was launched by Thomson Reuters in a bid to create a 100% Shariah compliant benchmark for pricing Islamic financial transactions. The IIBR uses the contributed rates of 16 Islamic banks and the Islamic sections of conventional banks “to provide a reliable and much-needed alternative for pricing Islamic instruments to the conventional interest-based benchmarks used for mainstream banking sector.”
However, given that only two Saudi-based banks are on the list of contributors out of the 16 banks, the main challenge of the IIBR is whether it can effectively facilitate cross-border transactions and funding given the diverse nature of the level of development of the Islamic finance markets across the board. Unless the rate is reflective of all the centers that partake in the initiative, industry players feel that this will still remain a market hurdle. — NH