"Islamic liquidity tools limited despite initiatives in some markets

" Islamic liquidity tools limited despite initiatives in some markets - Fitch Ratings \r\n\r\nIslamic banks in many countries continue to face a limited range of Islamic liquidity management instruments (ILMI) compared with conventional banks despite recent initiatives in a number of markets, according to Fitch Rating.\r\n\r\nThe rating agency noted that ILMI can provide Islamic banks with more funding options and can help them invest their excess liquidity.\r\n\r\nGaps in ILMI are more prominent in countries where Islamic banking is still developing a niche, stated t he report signed by Bashar Al Natoor , Managing Director, Global Head of Islamic Finance\r\n\r\nFitch Ratings noted that Sharia-compliant liquidity facilities from central banks can provide Islamic banks with an additional source of short-term funding.\r\n\r\nAccording to the report. in February 2024, the Central Bank of Jordan introduced new short-term liquidity facilities to Islamic banks.\r\n\r\n\u201cIn Bangladesh, the central bank introduced new Islamic liquidity facilities after Islamic banks faced\u00a0 sizable customer deposit outflows in 2022-2023 \u00a0amid reports of financing irregularities.\r\n\r\nCentral Bank Islamic liquidity facilities are also offered in most of the GCC countries, Malaysia, Turkiye, Indonesia, Pakistan, and Tunisia.\r\n\r\nHowever, these facilities, which could help avert a liquidity crunch, are not present in Oman, Morocco and Kazakhstan,\u201d it said.\r\n Islamic interbank markets are shallower than conventional markets \r\n \u00a0 The agency noted that Islamic interbank markets are much shallower than conventional markets, more so in countries with few Islamic banks.\r\n\r\nFitch noticed cases, including in the UAE, where Islamic banks are unable to place funding with conventional banks unless the latter use it for their Sharia-compliant business and the contract is Sharia-compliant.\r\n\r\nIn markets like Oman, regulations prevent Islamic banks and Islamic windows from placing funds with conventional banks. This limits counterparty choice.\r\n Government sukuk \r\nFitch Ratings\u00a0stated that the government sukuk can grant Islamic banks more options to invest their excess liquidity in high-quality liquid assets (HQLA) adding that these could also serve as collateral for Islamic repo.\r\n\r\nThe report noted that in 2023 and 2022, the UAE federal government and the Qatar Central Bank started issuing local-currency Treasury sukuk for the first time.\r\n\r\nGovernment sukuk are also available in Saudi Arabia, Malaysia, Bahrain, Indonesia, T\u00fcrkiye, Bangladesh, Pakistan, Oman, and Nigeria.\r\n\r\nHowever, regulatory hurdles are causing unavailability in some markets. In Kuwait, the lack of a public debt law prevents the government from issuing sukuk or bonds. In some markets, government sukuk are issued in lower volumes than bonds.\r\n\r\n\u201cWhile government sukuk could qualify as HQLA, its liquidity features are constrained by the buy-and-hold nature of Islamic investors stemming from limited sukuk supply in both the primary and secondary markets. In contrast, sukuk liquidity is generally good when issuers or investors seek to sell it.\r\n\r\nSukuk that are not AAOIFI-compliant could be less liquid as UAE Islamic banks are constrained from investing in them. If the \u201ctangibility event\u201d in sukuk is triggered, the Sukuk would be delisted from the relevant exchange, affecting its liquidity.\r\n\r\nWhile sukuk are generally issued with medium-to-long tenors, we do not see enough short-term government sukuk in both local and hard currencies,\u201d it said.\r\n\r\nAccording to the report, short-term government sukuk are not present in the UAE, Saudi Arabia, Kuwait, Oman, Jordan, Nigeria, and Egypt.\r\n\r\nHowever, these are issued in Malaysia, T\u00fcrkiye, Indonesia, Bahrain, Bangladesh, Brunei, Gambia, and by the supranational, the International Islamic Liquidity Management Corporation.\r\n \u00a0 Lack of standardization \r\nThe report stated that Islamic banks\u2019 usage of Islamic repos and its harmonisation is generally low due to a lack of standardisation and differences of opinion in terms of Sharia compliance.\r\n\r\nIn Malaysia, which has one of the most advanced Islamic finance ecosystems, the Islamic repo market is far less developed than the conventional repo market with only around 1% of the total Islamic money market volume.\r\n Outlook\u00a0 \r\nIn the GCC and a number of other markets, Fitch expects Islamic banks to maintain solid liquidity in 2024-2025.\r\n\r\nAs part of Fitch\u2019s assessment of an Islamic bank\u2019s Viability Rating, weak access to liquidity due to shallow markets or regulatory policies is likely to have a negative impact on Fitch\u2019s assessment of a bank\u2019s funding and liquidity."

"Islamic liquidity tools limited despite initiatives in some markets

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