Download Issues in Islamic Liquidity Management

Treasury Management in an
Islamic Financial Institution
Mohammed Tariq
Advisor, President IDB Group
Islamic Development Bank
3 May, 2011
1
Role of Treasury in an Islamic
Financial Institution

Management of liquidity

Resource mobilization

Hedging through profit rate and currency swaps
2
Management of liquidity

What is liquidity?




Availability of funds as and when required.
Hold cash and securities which can be liquefied
at short notice.
Securities or instruments should be such which
have a minimal negative impact on the sale of
such securities, hence, minimum price risk.
Ability to deal in reasonable size or quantity
depending on an institution’s needs.
3
Management of the liquidity

Instruments for Management of Liquidity
o
o
o
o
o
o
Conventional Finance: Interbank market and
other investments e.g. treasury bills, commercial
papers, bonds, etc.
Islamic Finance: Placement of funds under
Commodity Murabaha
How does the Commodity Murabaha work?
Lack of liquidity in such placements.
Reciprocal arrangements through reverse
Murabaha.
Credit risks similar to conventional: lines to be
set up between counter parties. Limits
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management
Management of the liquidity
o
o
o
o
Islamic institutions can deal with conventional
banks.
Other instruments like Sukuk: problems of
longer duration, price risk, lack of liquidity, etc.
Trade finance deals with high quality parties
and/or bank guarantee.
Sukuk holdings to be held as part of
investment portfolio of the Treasury to earn
higher returns.
5
Management of the liquidity
 Asset Liability Management (ALM)
o
o
o
o
In order to meet disbursement requirements
of the institution, placement of funds should
ideally match the liability profile.
Techniques used for matching assets and
liability by size as well as maturity.
Need to have active lines with other financial
institutions to raise short-term funds as and
when needed.
Risks involved, if liabilities are much higher
than assets: impact of higher or lower interest
rates in future, credit risks etc.
6
Management of the liquidity
 Role of the Regulators/Central banks
o
o
o
o
Lender of last resort role
Lack of Shariah compatible financial
instruments to intervene in the market for
Islamic institutions.
Treasury bills or other such high quality
instruments are not acceptable under Shairah
rules.
Need for regulators to provide shot-term
instruments for Islamic financial institutions.
7
Resource Mobilization needs
 Central to Treasury functions in an Islamic
financial institution
o
o
o
Close involvement of the Treasury with the
operational units of the bank to assess short
and medium-term business plans and hence
resource needs.
Clear assessment of the cost of funds for
different periods to be provided to the
business units in order for pricing such
products.
Pricing Methodology for financing.
8
Resource Mobilization needs
 Instruments for Resource Mobilization
o
o
Short-term: Reverse Murabaha upto 1 year,
mostly upto 3 months, Price risk.
Long-term:
o
o
o
o
o
Asset backed Sukuk: Over 51% need to be backed
by tangible assets e.g. lease rentals, eligible
Sukuk, equities, etc. Minority, i.e. less than 50%
can be debts e.g. Installment Sales, Istisna’ etc
Availability of acceptable assets
Rollover Commodity Murabaha, upto 3 years,
Issues of fixed vs. floating rate
Asset backed Sukuk tradable, others not so 9
Hedging
 Profit rate and currency swaps for
managing treasury risks
o
o
o
Objectives and methodology
For profit rate swap: fixed vs. floating rate and
vice versa
Currency swap
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