Home Publications Islamic Banking & Finance Page 09th November 2018

Islamic Banking & Finance Page 09th November 2018


Developing Islamic Money Market-The Islamic money market is integral to the functioning of the Islamic banking and financial system, firstly, in providing the Islamic financial institutions with the facility for funding and adjusting portfolios over the short-term, and secondly, serving as a channel for the transmission of monetary policy.

In 2005, IFSB based in Malaysia constituted a task force to work on its modalities. From Pakistan Mr. Muhammad Arif Divisional Head of SBP at that time and later departmental Head represented in the Task Force for two years.

The Money Market Task Force

The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released draft guidance on liquidity management for Islamic banks and new standards for regulatory supervision, as the industry body tightens oversight of banking practices.

IFSB guidelines allow national financial regulators to have the final say on how they apply standards, but its prescriptive approach is gradually helping to harmonize practices across the industry’s core centers in the Middle East and Southeast Asia.

The IFSB’s guidance note on liquidity management aims to clarify the accounting treatment of Islamic deposits and defines the types of high quality liquid assets (HQLA) that Islamic banks can hold to meet regulatory requirements under the Basel III banking standards now being phased in around the world.

HQLA can range from cash and central bank reserves to Sukuk (Islamic bonds) issued by both sovereigns and corporate, subject to various haircuts, IFSB says.

Given the shortage of such instruments, the IFSB outlines three other actions which regulators can take to facilitate the industry: liquidity facilities from central banks, allowing banks to hold HQLA in international currencies, and widening HQLA criteria.

This would help Islamic banks meet Basel III liquidity coverage ratios that are being phased in from 2015 to 2019; a net stable funding requirement was to be implemented in 2018.

Regulators must also decide on the treatment of Islamic deposit holders, who must be classified as investors, as a liability to the bank, or as a mix that is partly risk- absorbent, the IFSB says.

Pakistan has brought 3 years Govt Sukuk amounting Rs 385.4 billion as of Oct 2018. Further it has decided to facilitate Islamic Banking industry in their liquidity management and more effective transmission of monetary policy. For that SBP has decided to outright purchase or sale Government of Pakistan Ijara Sukuk (GIS) either on deferred payment basis (Bai-Muajjal).Technically it is a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments.

Now finally there is no other opinion that Islamic Banking in Pakistan is still standing on perception and not on innovations and new techniques. The main responsibility in this regard lies on SBP. For Islamic Money Market development the main emphasis should be on Research and Sharia Compliant side. It has been seen that most of the Treasurers in Islamic Banks use conventional methods for their liquidity management. This is absolutely wrong. Secondly SBP should focus on bringing complete legislation for Islamic banking. Moreover Hybrid instruments (mix of debt and non-debt based instruments) with short term period be brought in. Pakistan does have an experience of Short term Federal Bonds for 3, 6 and 12 months floated in some period of 1990-2000 where markup was allowed on par value. The same model can be adopted in these cases. For liquidity injection Musharkah model can be adopted being used in Export Refinance Schemes. One must remember that in Indonesia and Malaysia they work with Islamic and conventional Banks on clean basis i.e. without collateral, but in Pakistan SBP work on collateral basis. So we have to change our techniques a lot in case of Pakistan.

SECP enforces Sharia Governance Regulations 2018-The Securities and Exchange Commission of Pakistan (SECP) has enforced the Shariah Governance Regulations 2018, in order to make full compliance in line with the spirit of the Article 38 (f) of the Constitution of Pakistan.

Under the regulations, no business will claim as Shariah compliant or as an Islamic financial institution unless it obtains certification for Shariah compliance from the SECP, Certification will also be required for issuing a Shariah compliant security.

The jurisdiction of these regulations is the corporate sector, Shariah-compliant corporate sector, Islamic capital markets, Shariah-compliant securities and Islamic financial institutions.

The enforcement of a comprehensive framework for Shariah-compliant business is a major breakthrough to lay the foundation for a true Islamic financial and economic system.

The regulations are in furtherance to the Senate’s resolution moved by Senator Shibli Faraz and unanimously passed on July 9, 2018, whereby the House recommended that the government should take necessary steps to abolish Riba at the earliest and at least 30 percent of the new government debts should be replaced with Shariah-compliant modes of financing.

The issuance of these regulations is a leap forward towards development of a long-term, sustainable Islamic financial market, corporate sector and capital market.

The regulations will help deepen Shariah-compliant businesses and financing and will set the momentum for an all-embracing use of Shariah-compliant securities for Shariah-compliant investments and financing as the regulations provide opportunity to every business irrespective of its size or line of business to become Shariah-compliant or to issue Shariah-compliant security listed or unlisted.

These regulations encompass a number of elements of Shariah governance necessary to execute Shariah compliance and to uphold the sanctity of Shariah in business and financial dealings and operational practices that will ensure long-term sustainability for the Islamic financial system to stay on sound footings.

They include certification for Shariah compliant companies and Shariah compliant securities, a comprehensive Shariah screening methodology for listed as well as for unlisted companies, internal and external Shariah audit, Shariah advisory, Shariah compliance, income purification and charity distribution mechanism.

The regulations will alo make the collection and analysis of data on corporate sector in conformity with Shariah, possible.

The regulations will help curb the use of word Shariah or Islam by the businesses that entice investors for ulterior motives.

The regulations are critical for addressing the challenges such as restoring the shaken confidence of public and investors, and putting in place a viable long-term solution to avert a muddle in the guise of Shariah for the future.


Latest News on Islamic Banking and Finance

  • Bank of Algeria will release its long-awaited Islamic banking regulatory framework in November, laying the first stone of a friendly environment for the industry to thrive after almost 30 years of development in a grey area. Islamic banking in Algeria can be attributed to the process of financial liberalization. However, the sole Islamic bank operating in the national financial market was Banque Al Baraka d’Alge´rie that offered a limited number of financial products, and most of them are being used in short-term financing. Algeria’s Prime Minister had already announced that Islamic banking and financial services are to be approved in two public government banks with four other banks in 2018.

  • Intending to boost Islamic secondary market, Indonesia is planning to issue short-term Sukuk while Turkey has shared its intention to sell a new batch of Islamic lease certificates in 2019 including gold indexed instruments….In the gold-denominated bond, which will be issued in return for the gold to be collected from investors, a certain amount of yield will be paid to the investor in the Turkish lira in the interim period and the said yield will be indexed to the gold prices finally. The IDB is also working on a euro Sukuk facility.

  • Sri Lanka has approved a resolution that could pave the way for the nation’s debut sovereign Sukuk. The industry really took off in Sri Lanka when Amãna Bank entered the fray in 2009. the Colombo-based bank serves retail and corporate customers, has a wealth-management division targeted at mass affluent, and reported a pre-tax profit of SLRs739 million ($4.7 million) in 2017, more than seven times the previous year’s figure, on net financing income of SLRs2.75 billion. Total assets rose 17% over the same period, to SLRs63.5 billion, while the financing margin increased to 4.2%, from 3.6%. The first big established player to throw its hat entered into the ring, in 2012 i.e. Hatton National Bank. It’s a bank-within-a-bank, adhering strictly to Islamic principles. In Sri Lanka Islamic finance isn’t still close to capturing 10% of the market, so the potential is still very big. Another Islamic finance specialist notes that while “the population of Sri Lanka is around 10% Muslim, however the contribution by the community to overall GDP is far more significant. 10% of the population in fact generates 25% to 30% of all economic output.”

  • A series of mergers are going on in GCC giving further strength to Islamic banking. Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank are one of them and credit positive for the country’s banking industry, according to Moody’s Investors Service.

The merger would increase banks’ pricing power, reduce pressure on their funding costs and increase their ability to meet sizeable investments,” the rating agency says in a report. It would also contribute to consolidation of the “overbanked” sector in the UAE. ADCB, the second largest lender in the capital, said last week it is exploring the possibility of a merger with rival UNB and Sharia-compliant lender Al Hilal, which would create the Arabian Gulf’s fifth largest banking entity with around $114 billion (Dh418bn) in combined assets.

We can see more bank consolidation in the Gulf Cooperation Council (GCC), with most activity likely in the United Arab Emirates,” says Sergey Dergachev, who helps manage about US$14bn at Union Investment Privatfonds GmbH in Frankfurt. Compared to Saudi Arabia, the population in the UAE is excessively banked with a few large banks and lots of smaller ones.

Two of Oman’s biggest banks are saying that they’ll explore a combination that could create an entity with US$20bn in assets. The latest deal spree is being spurred by the tie-up in 2016 of National Bank of Abu Dhabi and First Gulf Bank to form First Abu Dhabi Bank, the first major merger since National Bank of Dubai and Emirates Bank International nine years previously combined to create Emirates NBD.


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