Cash is not always king
Holding too much cash is not just an issue for banks and insurance companies whose capital adequacy calculations are impacted by not holding the ‘right’ kind of investments. The overall returns of family offices and asset management businesses are impacted by the near-negative rates on offer for liquidity management solutions (after-costs are quite often negative).
There are of course very effective overnight cash management and ‘redeposit’ solutions in the market along the lines of DDCAP, Eiger and DepositBook. Issuers of short-term papers, which would be the convention solutions, are limited to the International Islamic Liquidity Management Corporation (the overwhelming dominant market participant) and the Central Bank of Bahrain.
Accessing these alternatives is not necessarily easy for small and mid-tier investors (whether insurance companies, banks or funds). This problem is exacerbated by the limited range of currencies available, primarily the US dollar and Bahraini dinar, as well as the limited to very short duration.
Market need and opportunity
In response to the aforementioned challenges and putting them together in the face of rising inflation, Al Waseelah created a Shariah compliant short-term certificate program called IMMC. Designed specifically to be multicurrency and with a duration of up to 18 months, IMMC offers a liquidity management solution through a combination of capital market infrastructure and technology to provide a customizable, positive yield treasury and liquidity management product.
Key elements of the solution are:
1. Positive returns — where do positive yields at the short end of the market come from? With a benchmark of at least 125bps over the relevant benchmark, IMMC the target is aggressive (compared with yields for other treasury instruments). This is achieved through back-to-back sale and purchase agreements in the supply chain. This covers ready-made garments, commodities as well as consumer goods. The demand for more short-term financing of the supply chain is growing (and banks are reducing their exposure). IMMC is a key participant in a growing number of markets and in 2022 will actively support the export markets in countries like Uzbekistan, Bangladesh and Indonesia.
2. Flexibility — IMMC issuances by Al Waseelah in 2021 extend to 360 days (and as short as 90 days) and as cross-currency solutions (euro, pound sterling and US dollar).
3. Expertise — the IMMC solution combines the expertise of Bedford Row Capital and the legal and operational platform which is encompassed within Al Waseelah. Bedford Row Capital has experienced supply chain capabilities (boots-on-the-ground expertise over four decades in supply chain management) as well as the capital market expertise to deliver the IMMC product to the market.
4. Technology and transparency — Al Waseelah has the benefit of technology developed by Bedford Row Capital called Bondstream. This technology, as featured in the IFN Fintech Landscape, offers a Shariah compliant product management architecture for the issuance of Sukuk. Specifically for IMMC, there is a dedicated dashboard available to investors which gives real-time exposure metrics to the constantly changing exposures which underpin each IMMC issuance.
Extending the liquidity management horizon
In 2021, the award-winning Al Waseelah Sukuk issuance platform will issue more than 12 instruments at various durations and currencies. These offer a new toolkit for treasury and liquidity management professionals. Alongside the current set of offerings, IMMC will continue to provide innovative solutions, including floating rate and direct, inflation-linked options. Shariah compliant investors need more options for positive returns at the shorter end of the market; Al Waseelah’s IMMC joins a limited list of options for financial institutions to deliver to their liquidity management needs in 2022 and beyond.