The International Islamic Liquidity Management Corporation (IILM) can play an important role in issuing short-term Shariah compliant financial instruments. It has the backing of 11 major regulatory authorities in the Islamic world, the IDB and Luxembourg, which is attempting to attract more Islamic funds. However structuring such instruments is challenging and will take time as the IILM has only been functioning for two years. There are also currency issues as the aim is to foster cross-border investment flows.
It is more important to design credible instruments than rush and issue Sukuk whose structure is criticized. Patience is therefore needed, especially as the Basel III timetable for increasing liquidity provision extends to 2019.
RODNEY WILSON
Emeritus Professor, Durham University UK and Visiting Professor, Qatar Faculty of Islamic Studies
The IILM, once fully operational, will be an important provider of liquidity to the industry. With the delay in issuance of its planned Sukuk there are a number of risks for IILM itself. Firstly, there is the potential that another institution will be encroaching on IILM’s territory and thus reduce its relevance. Secondly, it may lose its credibility if the issuance does not take place in the near future.
DR NATALIE SCHOON
Principal consultant, Formabb
The establishment of the IILM was another great innovation by the IFSB, with the sole objective of developing cross-border short term Islamic instruments to face illiquidity problems that have been hindering Islamic finance and Sukuk for years. The delay in execution is fairly acceptable because, from Jeddah to Jakarta (where Islamic financial players are clustered) there is a huge disparity in legal, tax and regulatory frameworks, and consequently engineering the framework acceptable for everyone is indeed troublesome.
The illiquidity challenge for Sukuk has been less on the domestic end, with a stream of both sovereign and corporate short term domestic Sukuk issued on regular basis. For example, the monthly short-term Sukuk and the one-week Islamic Sukuk Liquidity Instrument (ISLI) offered by CBB; or the periodic issuances by Bank Negara and mortgages conglomerate Cagamas. So on the domestic end, the illiquidity problem has been to some extent alleviated. But within international markets, the issue has not yet been addressed whatsoever, and the IILM is the first body attempting to address and resolve illiquidity. With an estimated 2 billion worth of short-term US dollar Sukuk issued annually, the IILM will indeed, to some extent, resolve the illiquidity issue.
With regards to avenues that may help boost the industry’s liquidity, we must first look at the factors causing illiquidity.
First, the demand/supply imbalance: having an instrument listed on an exchange does not mean there is someone willing to buy it. So it is more about having someone interested in buying at the very same moment you want to sell. The gap is also broadened by the lack of variety of Islamic instruments. Another insight of the imbalance can be attributed to the mismatch between Malaysia and Saudi Arabia. Malaysia is by far the most developed systemic Islamic financial market in the world with solid market architecture in place and an active secondary market. Saudi Arabia, on the other hand, has the largest liquidity pool in all Islamic countries and as such is potentially the largest Sukuk ingest market in the world.
Second, the disparity in Shariah opinions and acceptance of some Sukuk structures, and even further, the opposing views on the tradability of Sukuk. It is possible that certain investors shy away from secondary market trading because of a lack of clarity as to the acceptability or not of the structure deployed. Were a scholar to rule against a particular structure/issuance, it would cause huge complications on both an individual level and in terms of market reaction.
Allied to the Shariah risk of Sukuk is the legal risk and taxation issues. Further, the scarcity and inaccuracy of Sukuk valuations and inadequate market transparency. To this date market players still suffer from inaccurate valuations and incomplete information which eventually repels them from buying Sukuk both in primary and secondary markets.
Last but not least, the hold to maturity culture in Sukuk: with the very little supply of Sukuk, Sukukholders feel unable to trade out of a position for fear of not being able to find another Sukuk in which to invest. As a result the prevailing culture in the Middle East is to buy and hold to maturity. The problems this causes with liquidity are obvious.
GHADA ESSAM
Sukuk product manager, IdealRatings
Given the important task mandated to IILM and its medium to long-term positive implications, IILM will contribute in the further development of Islamic liquidity management but the industry needs to be patient and we should not create development institutions and then move to create another. Another point to note is that it takes time to develop a multilateral/infrastructure institution.
What is needed is that the contributions from other infrastructure structure institutions, such as IIFM standards on liquidity management, are implemented across Islamic jurisdictions; as joint cooperation is the best way to move the Islamic finance industry to next phase of development and growth.
IJLAL AHMED ALVI
International Islamic Financial Market
Let’s not prematurely bury the IILM and deliver the rest in peace eulogy without giving Professor Rifaat Abdul Karim a chance to share his vision. He achieved remarkable success at AAOIFI and IFSB, as both are now globally recognized industry bodies as ‘go to’ sources of information on our emerging industry. Yes, as a young industry, like all young industries, we are going through growing pains of hiccups on human asset assignments, mistimed deliverables, and slight deviations on the road to conventional efficiency, but that’s not license to say “next”.
The opposite of “next” is commitment, and commitment requires experienced refinement which conveys a strong signal/message that we will get there, just be patient a bit longer. As Rome was not built in a day, neither will addressing robust international short term liquidity in Islamic finance.
RUSHDI SIDDIQUI
Global head, Islamic finance & OIC countries, Thomson Reuters
In my opinion, the delay in issuing of the first Sukuk by IILM is understandable. It is quite likely for a new body to delay its product offering and IILM should not be taken as an exception. Now that Rifaat Abdulkarim, the former secretary general of IFSB, has been appointed as the new CEO of IILM, one should expect that the organization will become more active and effective.
One possible avenue is to set up a global micro-Sukuk platform in London to allow treasury managers to invest in the Sukuk issued by small and medium sized enterprises in UK and Europe. The size of these issues could range from GBP100,000 (US$159,000) to GBP5 million (US$7.95 million). The total size of the proposed platform could possibly reach GBP1 billion (US$1.59 billion) in a span of one year. The initiative could be supported by the UK government in an attempt to keep London relevant to liquidity management, after a visible decrease in the use of the LME for commodity Murabahah transactions.
PROFESSOR HUMAYON DAR
Chairman, Edbiz Corporation
Many Islamic Finance
news articles have stressed the need for Islamic banks to have access to high quality short term instruments in appropriate currencies to manage their liquidity.
The International Islamic Liquidity Management Corporation (IILM) was established to provide these instruments. It has many central banks from Muslim majority countries as members, and a law was passed in Malaysia (the International Islamic Liquidity Management Corporation Act 2011) to facilitate its establishment in Malaysia as an international organization. The IILM website contains many details about its governance structure. However no instruments have yet been issued.
I could not find on the IILM website answers to the key questions that will matter to a bank that is to hold IILM paper for liquidity management purposes, and to a bank regulator who is to assess the creditworthiness of that IILM paper.
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Will the member central banks stand behind the liabilities of IILM? I assume the answer is no, but it needs to be explicitly addressed.
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What will be the equity capitalization of IILM?
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What structures will be used for the Sukuk?
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What currencies will IILM issue in?
Most importantly, whose creditworthiness will underlie the Sukuk? For example, with a Sukuk Ijarah issued by an SPV based upon buying a building from an original owner, leased to that original owner, and with a purchase undertaking from that original owner, the Sukuk investors are ultimately relying upon the creditworthiness of that original owner. It needs to be IILM’s credit; hence question (2) about the equity capitalization.
I suspect that IILM has not issued any instruments yet because these questions have not been resolved.
MOHAMMED AMIN
Islamic finance consultant and former UK head of Islamic finance at PwC
In my opinion, one of the reasons why the issuance of the first IILM Sukuk was somehow delayed, lies in the fact that just two days after the IILM’s incorporation, the European Council published Council Regulation No 961/2010 imposing enhanced economic sanctions against Iran, one of the founding members of the IILM. As the aforementioned Regulation imposed various restrictions on insurance and other financial services, this external constraint made it difficult for the IILM’s founding members to agree on an appropriate cooperation vehicle to support the issuance of the contemplated Sukuk. In addition, at the same time, IILM also had to find a vehicle which could meet both the civil law and common law requirements of its members.
However, it should be noted that, in June 2012, two vehicles have been incorporated in Luxembourg (International Islamic Liquidity Management and IILM Holding). Therefore, I anticipate that the IILM should issue its first planned Sukuk during the first half of 2013 and position itself as a major facilitator of the liquidity among institutions offering Islamic financial services.
In my opinion, the industry’s liquidity is, for the time being, restrained by the current gloomy economic situation. Therefore, there are reasonable grounds to believe that the liquidity of the Islamic finance industry may only be boosted by initiatives coming from and financed by the public sector such as the IILM.
SUFIAN BATAINEH
Managing director, Dananeer