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13 November 2011

Islamic financial industry ‘must improve its liquidity’

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Islamic finance institutions must improve their liquidly requirements if investors are to be reassured, the governor of the Central Bank of Bahrain has warned.

By Aamina Zafar

Rasheed al Maraj said the CBB has been at the forefront of innovation in assisting Islamic financial institutions to manage their liquidity, but more still needs to be done both by regulators and the industry.

He added: “The conventional financial industry received a wake-up call during the crisis concerning the importance of understanding, monitoring and controlling liquidity risks.

“The Islamic financial industry must recognise that it also needs good liquidity risk management.”

However, he added that Islamic financial institutions find it difficult to manage their liquidity risk given the relative lack of short-term money market instruments in which they can invest.

This is because Islamic financial institutions cannot invest in interest-based products.

Ibrahim Thompson, IFA for London-based Radcliffe & Newlands, said: “Improved liquidity itself probably won’t change this but it should give a little more comfort to investors.

“But I don’t know if improving liquidity will make Islamic finance any more accessible to UK investors or not as the majority of Islamic fixed-income funds are institutional and not generally available to small or relatively small investors.”

Gary Carney, Treasurer at Islamic Bank of Britain, said: “It is true there is a relative lack of liquid short-term Islamic instruments so it is therefore even more imperative for an institution like IBB to establish and maintain robust liquidity management systems and controls in order to assess funding requirements and to ensure that at all times there is sufficient liquidity to meet its obligations.

“In addition to this, IBB has identified and continually assesses its main liquidity risk drivers and as a guiding principle will always maintain sufficient liquid treasury assets to meet its net cash outflows even during periods of market stress.”

(Courtesy: FT Adviser)

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