A
statement from NBAD stressed that the two banks concluded a one week
maturity deal valued at $20 million against Malaysian and Abu Dhabi
government-related entity sukuk. "NBAD and ADIB jointly embarked on this
initiative to formalize the Master Collateralized Murabaha Agreement
(MCMA), thus enabling Islamic banks to utilize their holdings of sukuk.
The MCMA offers a Shariah-compliant alternative to the repurchase
arrangement, which conventional banks and financial institutions (FIs)
use to lend and borrow at extremely low risk," explained the statement. Both
banks are confident that the MCMA will provide Islamic financial
institutions with an efficient and cost effective tool to manage short
and medium-term liquidity. According to Mahmood Al-Aradi, general
manager financial markets division, NBAD, "this type of transaction will
set the stage for future collateralized Murabaha trading in the sukuk
market, which will greatly boost this segment and the secondary market."
His colleague, Mark Pritchard, head of Islamic institutional coverage,
NBAD, is even more bullish about MCMA's fit with the flourishing sukuk
market. "With global issuance of sukuk this year to be around $25
billion to $30 billion, the MCMA will be of significant benefit to the
Islamic financial market participants who, up to now, haven't been able
to fully maximize their holdings of sukuk whilst still maintaining
ownership."In fact, UAE central bank governor, Nasser Al-Suwaidi,
sees liquidity management in the Islamic finance industry as a major
challenge for the industry going forward. In a keynote speech at the
WIBC Asia conference in Singapore in June 2011, he strongly hinted about
a forthcoming solution, namely the MCMA. "Another challenge is the
short-term liquidity management at Islamic banks and other financial
institutions. This is not a straight forward issue and has been under
discussion between Islamic banks and central bank of the UAE. There is
now a reasonable proposal to advance a solution for this issue," he
added. The MCMA structure is in fact a repo equivalent which accepts
UAE Central Bank Islamic certificates of deposits as collateral against
cash, thus enabling liquidity to be freed up. According to the UAE
central bank, at end April 2011, banks in the UAE were holding some
AED12 billion of these Islamic certificates of deposits. It is not
clear whether the product is related to the I'aadat Al-Shira'a (IS) —
the Islamic alternative to repo product being developed by the
Bahrain-based International Islamic Financial Market (IIFM), which
published a reference paper on it in July 2010. Liquidity management
and managing reserves and capital held by Islamic banks at central
banks is a major challenge for the sector. There are no cross-border
products available in the market, although the mandate of the
International Islamic Liquidity Management Corporation (IILM) which was
established last year is just that. It would be interesting to see
whether the IILM also becomes interested in the MCMA or whether it will
stick to its position of creating a pool of AAA rated sukuk whose
certificates can then be actively globally traded to release liquidity. The
most common money market instrument to manage liquidity hitherto used
by Islamic financial institutions and central banks include the
commodity Murabaha, which has an implicit disadvantage in that it is not
tradable under Shariah principles and may carry some market, commodity
price, counterparty, credit and even Shariah risk. There is also the
interbank Mudarabah investments in Malaysia, Indonesia and Bangladesh
where the interbank placement of funds from overnight to 12 months
produces returns based on agreed profit ratio. In Saudi Arabia and
Kuwait, Islamic financial institutions (IFI) also use interbank
compensating mutual financing facilities within the profit-sharing
framework. This involves the exchange of interest-free deposits with
arrangements to ensure that net balances average to zero in a defined
period. Other liquidity management instruments used by central banks and
governments are central bank deposit facilities, required IFI reserves
and excess reserves; Central Bank market-based instruments for open
market operations (OMOs) and government financing instruments. Other
instruments include standing central bank credit facilities based on
Murabaha or tied to Mudharabah deposit rates of banks receiving credit,
or through buyback arrangements for specified Sukuk held by banks. Market-based
instruments used by Governments and Central banks include government
and central bank Musharaka certificates (Sudan); government investment
certificates (Sudan and Pakistan); government investment issues
(Malaysia); government and central bank participation papers (Iran);
central bank Wadiah certificates (Bahrain, Indonesia, Malaysia);
government and central bank Ijarah certificates (Sudan, Malaysia,
Bahrain, Brunei); sale and buyback agreements (Islamic alternatives to
repos) (Malaysia); government Islamic investment bonds (Bangladesh); and
Sukuk Al-Salam (Bahrain). The IIFM's I'aadat Al-Shira'a
(repurchase) project in fact also explores the concepts and structuring
possibilities of an Islamic alternative to repo and collateralization
based on the Murabaha. Bankers stress that repos are important tools in
cash and liquidity management; in creating liquidity in the underlying
instrument; in financing and leveraging the investment; in credit
enhancement and greater volume; in playing a role in other structured
products (derivatives, swaps etc); and in oiling the wheel of the bond
market. The objectives of the I'aadat Al-Shira'a (repurchase) project,
according to IIFM, include the funding the positions of sukuk and other
instruments; better asset, liquidity and cash management; assisting in
Sukuk credit and yield pickup and increasing secondary market liquidity
in sukuk; a useful tool which can be used by central banks to control
money supply and to better fulfill reserve requirements. The
project's leader, Ismail Dadabhoy, head of Islamic finance at UBS,
explained at the time of the launch of the reference paper that "finding
a solution for repo alternative product that satisfies Shariah while
also being acceptable to the general market has been a real challenge.
As an ex repo trader, I know how important this product is to the short
term and fixed income traders. I am convinced wider use by the market of
I'aadat Al-Shira'a will add liquidity in the system in terms of cash
funding and liquidity float of sukuk. It will ‘oil’ the wheels for
efficiency and be a boost for sukuk".In the conventional sense a
repo, according to IIFM, is a simultaneous purchase and sale of a
security at a pre-agreed time and price. The agreement is between two
parties, whereby one party sells to the other party a security at market
price. In terms of the Shariah, this is acceptable. However, there is a
commitment to buy the same security back at a later date for a
pre-agreed price. This presents a major Shariah issue. In a classic
repo, the transfer of title takes place but ownership is maintained. The
economic benefit is not transferred which means interest or dividend is
paid to original owner. Mark to market and margin mechanism is allowed.
In a buy and sell structure, there is a complete transfer of all rights
and benefits.
