Islamic treasury is one of the major challenges facing cross-border banking as it encompasses various regulatory reforms both globally and at the regional level. Islamic treasury is becoming an intrinsic part of the global interconnected financial system, where financial markets across jurisdictions become more connected and economies become more interlinked. Simply put, joining up the dots is becoming more important. Moreover, the potential role of Islamic finance in the international financial system is resulting in increased interdependence, and thus the search for solutions has become more challenging. MIRZA ASHRAF BEG delves further.
Regulators, the industry, government organizations and market players have all stressed the urgent need for a global Islamic interbank market and treasury management, the lack of which they see as hampering the systemic development of the Islamic finance industry. The global financial crisis and the credit crunch have led to a renewed effort to come up with a mechanism that is global, effective, efficient and Sharīah compliant. Having good treasury management is a key prerequisite for sustaining financial stability and helping to alleviate any asset and liability management-related risks.
Figure 2: What tools and technologies are available that are triggering innovation in treasury? | |
Technologies: | Cloud based solutions
Multidimensional APIs Blockchain Distributed ledger system Cybersecurity integration Data mining alghorithm |
Triggering innovations: | Payment system innovations
Smart contracts Settlements Multilateral clearings Big data and analytics made easy STP APIs/platforms for all peers |
Source: Author’s own |
At present, Islamic treasury operations are not well integrated into the overall markets in most jurisdictions. Compared to the GCC and Southeast Asia regions, which lie at the heart of Islamic finance, the rest of the world is at various stages of development of Islamic finance and has different challenges. For instance, the UK, while having a well-established Islamic finance industry, is still working on Islamic liquidity management. Its liquidity structure, especially in the light of new liquidity requirements announced recently by the Financial Services Authority, is a major challenge for Islamic banks. As such, Islamic banks in the UK are further hampered because they cannot place their reserve requirements with the regulator on a Sharīah compliant basis. Newcomers such as China, Japan, South Korea, Australia, France and other countries are still striving to establish a Shariah compliant treasury structure. Most of them are still in the early stages of development.
The unique nature of an Islamic bank’s business model gives rise to unique governance challenges. First, the divergence of interest between holders of investment accounts and shareholders needs to be recognized in the banks’ governance structure. A second governance challenge for Islamic banks relates to Shariah compliance. In line with IFSB recommendations, a sound Shariah compliance framework is expected to include a Shariah supervisory board, an internal Shariah review process and periodic Shariah reviews. Ensuring an adequate alignment of the regulatory framework with the guidelines of standard-setters is key to addressing the main risks inherent in Islamic banks’ operations and will help in achieving a level-playing field with conventional banks. While complying with the Basel Core Principles for Effective Bank Supervision should be a priority for all countries, most jurisdictions would also benefit from implementing Basel II and III. It is expected that jurisdictions with a strong Islamic banking presence will face significant challenges when implementing the liquidity coverage ratio due to the lack of a diversified portfolio of high-quality liquid assets. Another big challenge is the compatibility with AAOIFI, IFSB and Shariah supervisory boards versus ESMA/EMIR, MiFID II, Dodd Frank, IFRS, IAS, BASEL, ISDA, ISA, etc, which is a major roadblock to global accessibility and acceptance in the functioning of a smooth business.
According to a recent Deloitte study, regtech should be seen as an exciting advancement in the industry which will provide Islamic banks with the following capabilities:
• Process and data agility: Cluttered and intertwined data sets can be unbundled and organized through ETL (extract, transfer load) technologies
• Reporting speed: Reports can be configured and generated quickly, even when a specific rule changes, offering a great capability of adapting to the fast and ever-changing regulation environment.
• System integration: It offers short time frames to get solutions up and running within any existing or legacy ecosystem.
• Analytics: Regtech uses analytic tools to intelligently mine existing ‘big data’ sets and unlock their true potential, eg using the same data for multiple purposes.
• Cloud-based solutions: Regtech solutions use the cloud-based solutions meaning that data is remotely maintained, managed and backed up. Cloud-based solutions provide many advantages, such as cost control, infrastructure flexibility, scalability and security. In order to provide a better understanding of why the financial services industry sees so much importance in the regtech world, after the recession, banks in the US alone have spent more than US$160 billion in fines, penalties and settlements for non-compliance of regulations. A good example is the London-based HSBC Bank, which spent US$2.2 billion on regulation and compliance in the first nine months of 2015, an increase of 33% year-on-year according to the institution.
The reservations against prudential norms imposed by all regulators globally could be easily overcome by implementing the following step in Islamic banks across the regions:
• Use of treasury technology for research and academic reports, case studies and vendor landscape reviews affecting institutional wholesale banking, treasury and transaction banking from leading analyst and advisory firms
• Use of analysis and advisory services which can cover bank systems, bank technology, fintech, trend analysis, software quadrants and cloud-based solutions
• Use of artificial intelligence; analytics; machine learning; core banking; legacy transformation; corporate payments; regulatory compliance; risk management; innovation and others.
Mirza Ashraf Beg is the head of treasury, investment and CCBB operations of corporate operations at the Commercial Bank of Dubai. He can be contacted at [email protected].