MANAMA, 20 June 2007 — In the backdrop of billions of dollars liquidity, there is a need to establish a mega Islamic institution with the participation of all major players in the global market to address the most daunting challenges like liquidity and risk management being faced by the Islamic banking industry, Sheikh Nedham Yacouby, a renowned Shariah scholar, told the International Islamic Financial Markets Conference here yesterday.
“Such initiative will spur a new era for the IFIs in terms of consolidation and enhancing the base of the Islamic banks, in general and in particular, the countries with huge growth potential for the Islamic banks and financial institutions,” he said, adding that the pool of assets in the form of a mega institution, and development of different investment vehicles will provide a strong platform to Islamic banking industry to grow in line with the dynamic changes taking place in the conventional banking sector worldwide.
Yacouby, who was among the panelists in a discussion on Islamic liquidity management, highlighted the lack of innovation and consolidation of products and services of IFIs. “A peculiar ‘selfish’ approach among the Islamic financial institutions (IFIs) and no collective effort to devise a strategy or set of regulations for issues like Islamic liquidity and risk management will continue to minimize the scope of growth of this industry,” he said.
“Murabaha is there for the last quarter of a century but no efforts were spared to develop this vital instrument by the industry players. The IFIs do not cooperate and no collective efforts are seen at the institutional or regulatory levels to formulate a strategy on developing liquidity management tool. Countries like Bahrain — with highest concentration of Islamic banks and financial institutions, Malaysia, Sudan, Pakistan, Lebanon and other GCC countries — should join forces to create a mega institution to cater to the needs of the Islamic banking industry. The mega institution will serve as a long-term project for the participating countries allowing commodities trade and with more capacity to absorb risks. You can see that the commercial banks are booming and most of the commercial banks’ assets are public money. On the same pattern, mega Islamic institution can be created, supported by a strong regulatory regime, with capacity to handle liquidity more efficiently and objectively.”
“The disagreements among different Shariah scholars over musharka or murabaha products are peculiar examples of a lack of cooperation within the Islamic banking industry.”
Other participants touched on Islamic banking industry obstacles. Liquidity risks are more obvious due to gaps in applications and available resources, mismatching of tenors of sources and application of funds, as well as not meeting prudential liquidity requirements or lack of access to the market were the main reasons impacting the growth of the Islamic banking sector in general” it was noted.
The nonavailability of modes to transferring surplus liquidity as most Islamic banks cannot easily transfer to conventional banks due to issue of interest is another challenge. “There is room for exchange of surplus funds among the Islamic banks on a mudarabah or musharakah basis. The greater the number of Islamic banks and wider their activities, the greater will be the scope of cooperation in this field.”
The experts said that effective liquidity management would continue to be a cornerstone of the strategy. “To manage liquidity effectively, there is a need of visibility of cash positions, good forecasting, a way to concentrate funds and the ability to negotiate foreign exchange and get it done before cutoff times. An Islamic financial market will help to accomplish the mission and overcome the problem of liquidity management by participating through the respective Islamic modes,” they said.
