The IILM was launched at the inaugural session of the Global Islamic Finance Forum (GIFF) held in Kuala Lumpur in the presence of Malaysian Prime Minister Mohd Najib Tun Abdul Razak; Raja Nazrin Shah, the crown prince of the State of Perak and ambassador at large of the Malaysia International Islamic Finance Centre (MIFC) Initiative; Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank; and regulators and dignitaries from the Muslim world and beyond, including Muhammad Al-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA).

"Malaysia," stressed Prime Minister Mohd Najib, "is honored to have been chosen to host the corporation. Its ultimate aim is to enhance international integration of the Islamic money market and capital markets and to be better equipped to face any liquidity crisis. I wish to commend the foresight, innovation and leadership displayed by the IFSB, the task force and participating parties for this breakthrough, which surely will help take Islamic finance to a higher level of development."

Zeti echoed the milestone achievement of the establishment of the IILM which she maintained would enable more effective liquidity management not only for the Islamic financial institutions but also for the management of Islamic financial portfolios. Perhaps equally importantly, Zeti hailed the IILM as a demonstration of international collaboration among central banks.

"The greater collaboration among regulators seen in this decade cumulatively serve to contribute toward the continued resilience of the global Islamic financial system," she added.

The establishment of the IILM was first announced by the Islamic Financial Services Board (IFSB) at the side of the International Monetary Fund (IMF)-World Bank Group Annual Meetings in Washington held in October 2010. In fact, the founding participants signed a Memorandum of Participation in Washington. The lack of a truly global and well-oiled liquidity management scheme has been the bane of the industry, with no government or supranational taking on the task until now.

While the establishment of the IILM is a move in the right direction, any euphoria about the corporation making an immediate impact would be seriously misplaced. A number of central bankers stressed that the major challenge is to get the structure right.

One of the major challenges especially would be to identify suitable assets that can be the basis for the underlying transactions and that are tradable on a cross-border basis with full recourse to the law of the land. Hitherto, the main liquidity management mechanisms have been commodity Murabaha trades through LME (London Metals Exchange) warrants and more recently through trades based on palm oil contracts on the Bursa Suq Al-Sila' platform.

The promoters of IILM, which had its first board meeting on Sunday in Kuala Lumpur, have thus far revealed very little about the corporation's structure, the underlying contracts - whether commodity-based or equities or any other type. A statement from the IFSB said that IILM "will issue high quality financial instruments at both the national level and across borders, in an integrated manner, thereby enhancing the soundness and stability of the jurisdictions in which they operate."

The composition of the founding participants is interesting. They include the usual suspects - the central banks or monetary agencies of Malaysia, Saudi Arabia, Qatar, the UAE, Iran, Indonesia and Sudan. The participation of the central bank of Turkey is politically significant albeit that Turkey has quietly supported the Islamic finance sector in its own way since the introduction of the special decree for the establishment of special finance houses or interest-free financial institutions by the military government led by Prime Minister Bulent Ulusu in 1983. Similarly, Nigeria is an important new player since increasing its equity subscription to the IDB in June 2010 which has given it a permanent seat on the IDB board.

Another important signatory is Luxembourg, which is leading the European initiative in Islamic banking, with Yves Mersch, the governor of Banque Centrale du Luxembourg, underlying the seriousness of Luxembourg's Islamic finance policy with his presence in Malaysia. Another sign of the internationalization of Islamic finance is the participation of the Bank of Mauritius. The island state has been positioning itself as an offshore banking center, and sees Islamic finance as an increasingly important market segment. The other two signatories are the Islamic Development Bank (IDB) and its private sector funding arm, the Islamic Corporation for the Development of the Private Sector (ICD).

The promoters of IILM have also disclosed very little about the equity subscription of the corporation, suffice to say that the capital is $1 billion. Turkey for instance has subscribed to $5 million but according to a Central Bank of Turkey source, this may be increased to $10 million in due course.

The urgency of a liquidity management mechanism cannot be overstated. Markets all over including the established ones of Malaysia, Bahrain and the UAE are screaming for a well-established short term hard currency international liquidity management scheme to meet their various overnight, daily, monthly and even yearly requirements. There is a huge lack of this type of facility, especially one not managed by a commercial entity.

The lack of a global Islamic interbank market and a liquidity management scheme according to several Islamic bankers has hampered the systemic development of the Islamic finance industry. But in the aftermath of the global financial crisis and the credit crunch, a renewed effort has been initiated to come up a mechanism that is truly global, effective, efficient and Shariah-compliant. The need and urgency for establishing a global Islamic liquidity management scheme is further underlined by the fact that the global commodity Murabaha market is estimated at a staggering $1.2 trillion. 

The lack of an Islamic interbank or global liquidity system is impacting on the operations of Islamic financial institutions in both Muslim and non-Muslim countries. Islamic banks have hardly any liquid assets they can hold on to in many markets because of a lack of high quality sukuk assets; and there is no basis for placement of short-term assets with central banks for reserve and other requirements because there are very often no Shariah-compliant papers or instruments to invest in.