Assalamalaykumwarahmatullah and a good morning to all of you.
I would like to thank the organizers for inviting me to participate and give a keynote address at today’s forum.
Those of you who have been observing developments in the Islamic finance industry would have realized that the industry is going from strength to strength despite the recent global financial crisis. 2013 was another stellar year for Islamic finance with assets estimated at approximately US$1.8 trillion and 13% annual growth according to EY’s World Competitiveness Report. It is worth noting that the Islamic banking sector has been the driving force of this growth, accounting for around US$1.4 trillion of assets within the Islamic finance industry.
Recent headlines regarding overall Asian markets suggest that there has been a tepid start to 2014. With negative data emerging from Asia’s two largest economies, China and Japan, and mixed results coming from South and Southeast Asian economies in the first quarter, many prognosticators have already forecasted further gloom for 2014. Other long-term challenges for Asian economies persist, with the World Bank recently asserting that South Asia needs up to US$2.5 trillion of investment in infrastructure by 2020 if the region is to make further gains in battling poverty.
For the Islamic financial sector in Asia, these mixed conditions are not only challenges but also opportunities: opportunities not only for continued growth, but for greater collaboration between private and public sectors, greater support for microfinance, greater infrastructural development. However, these opportunities can only be taken if the growth in Islamic finance is carefully preserved. With this in mind the need for adequate regulation and monitoring of the industry has become increasingly relevant. Indeed, the role of regulators in developing and facilitating the industry should be closely considered. Furthermore, in order to ensure future growth, innovative endeavors such as the International Islamic Liquidity Management Corporation (IILM), which provide unique and potentially crucial services to the Islamic financial system, are particularly valuable.
In light of this, I will speak today on the role that the IILM plays in developing Islamic capital markets, while at the same time enhancing financial stability in Asia and beyond. It is only through the stringent safeguarding of this stability and shoring-up vulnerable aspects of the system that Islamic finance can be freer to fulfill is basic tenets of economic justice.
By way of background, the IILM is an international organization established in October 2010 by central banks, monetary authorities and one multilateral development group to facilitate liquidity management for institutions that offer Islamic financial services (or IIFS).
I take pride in saying that the IILM Sukuk are a significant milestone in the industry. They form a key component of a new asset class, namely Shariah compliant high quality liquid assets (HQLA) that meet the Basel III criteria for HQLA to which I will refer later. The IILM issuance program marks the first of many things, not only for Islamic finance but also in the conventional space as well:
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It is the first Shariah compliant, short-term, highly rated, tradable US dollar-denominated instrument in the market;
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It is the first money market instrument backed by sovereign assets in the form of Sukuk; and
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It has the first multi-jurisdictional primary dealer network that facilitates distribution to investors worldwide.
The IILM is the first IIFS on the international level that does not emulate the efforts of a conventional counterpart: Its efforts are unique. The current investor base of the IILM Sukuk ranges from Europe to the GCC, Africa and Asia, and the distribution network will be deepened further in the coming months.
The IILM issued its first Sukuk to the market in August last year. The initial issuance was for US$490 million. In January this year the IILM issued a further US$860 million bringing the total outstanding Sukuk issued to US$1.35 billion. Our issuances have all been fully subscribed at competitive prices and we are in discussion with new investors who will participate in subsequent issuances. During the course of the next few years, issuances will continue to increase in a steady and sustainable manner. With such growth, the IILM Sukuk will transform from the game-changing Sukuk they now are, to an indispensable liquidity management tool for IIFS everywhere.
We have spent much of our time and resources developing the financial technology of our Sukuk program, as well as creating awareness of the IILM Sukuk among potential investors. It is heartening to see the positive take-up from such investors in markets ranging from Luxembourg to Malaysia. The fact that the IILM Sukuk have been so well received is a sign of the continued maturation of the market and a sign that market participants are willing to work collaboratively with public-sector related institutions for the further development of the market.
We do not make these statements simply to be self-congratulatory, but to encourage the future support of products and services that shore up potential weakness in the Islamic financial sector. In light of the severe liquidity shortages which institutions in conventional markets suffered during the global financial crises, whose reverberations were felt in the relatively resilient Islamic finance sector, it would demonstrate foresight on the part of market players to address these issues now.
The IILM is a case where sovereigns and the private sector have worked together to develop a well-rounded solution to address liquidity management concerns. This shows that collaborative efforts between the two sectors can bring about results that are both encouraging and necessary. Indeed, there is no equivalent to the IILM in any other financial services industry, although it must be said that in the Islamic financial services industry the need was particularly acute. Islamic finance will be able to fulfil its true potential in Asia and beyond only if there is similar cooperation between governments and the private sector to pursue other innovative ‘firsts’.
The need for greater collaboration is also reflected in the major international efforts to address liquidity concerns for all financial institutions. The impact of international regulations such as Basel III should be borne in mind when considering liquidity requirements and the prevention of future crises in Asia. Basel III, which is being phased in from January 2015, requires national regulatory supervisors to set tough liquidity requirements for their domestic banks that have never been imposed before. While Basel III did not originally take account of the needs of the Islamic finance industry, in amendments made in January 2013, the Basel Committee allowed national supervisors some discretion as to the instruments that may be treated as eligible for the liquidity requirements of domestic finance institutions, with the intended effect of making it easier for Shariah compliant instruments to meet these requirements, which nevertheless remain very stringent. In this context, the IILM Sukuk are the only Shariah-compliant cross-border liquidity instruments in the market that meet the Basel III requirements for HQLA.
The IILM aims to enhance the ability of IIFS to manage their liquidity by issuing Sukuk which meet the Basel III criteria for HQLA. These instruments will have the following characteristics in order to meet market expectations, as well as meeting the recently promulgated Basel III guidelines:
a. High credit quality, backed by a pool of sovereign obligations originated by the IILM;
b. Tradable and supported by a robust primary and secondary market infrastructure offering a high degree of liquidity;
c. Denominated in international reserve currencies; and
d. Benefitting from preferential regulatory treatment granted by regulatory and supervisory authorities.
The IILM is focused upon obtaining appropriate regulatory treatment for its Sukuk consistent with the requirements of the Basel Committee for High Quality Liquid Assets. The IILM has continued to work closely with some of its members to obtain clear regulatory treatment for the IILM Sukuk, while others have already awarded such favorable treatment.
The successful launch and increase in volume of the IILM Sukuk issuances signify an important milestone for the Islamic finance industry. Although the IILM Sukuk are unique, they should be considered as trailblazing, opening the way for other high quality Shariah compliant liquid assets, as the industry matures further. Even in the light of the overall resilience and growth of Islamic finance, there is an ever increasing concern in the sector over systemic shortcomings and the damage that inevitable future crises may cause. This is exacerbated when broader, conventional markets have difficult quarters as experienced over the last several months.
These concerns are well-founded, but just worrying about them is not good enough for us. We must continue to push for products and services. We all have a duty to ensure that in the area of effective liquidity management and beyond Islamic financial markets continue to move forward.
Thank you for your attention and I wish you an enjoyable and productive conference.