New strategies introduced to meet Islamic liquidity management challenges

Thomson Reuters, the world's leading provider of intelligent information for businesses and professionals, in partnership with the Dubai Islamic Economy Development Centre (DIEDC), and in collaboration with National Bonds Corporation (NBC), the leading sharia-compliant savings and investment Company in the UAE, present the key findings from the Liquidity Management through Sukuk teaser report.  The key findings have been released in an exclusive press conference in the Global Islamic Economy Summit (GIES 2016) on October 12th in Madinat Jumeirah in Dubai, in the presence of key market players and professionals.

The dearth of Islamic liquidity management instruments has been a challenge in modern Islamic banking throughout its 40-year history. The teaser report, Liquidity Management through Sukuk, discusses the key challenges facing liquidity management in Islamic finance and highlights some of the current existing solutions to overcome these issues. The full version of the report will be released separately later this year. 

According to the teaser report, few instruments have been able to meet both the industry’s needs and its stakeholders’ full expectations. As a result, Islamic banks in the GCC today hold 9% of their assets in cash and equivalents and 10% in placements with other financial institutions. Currently, Islamic banks place liquid funds in short-term instruments such as commodity murabaha that Shariah rules have deemed non-tradable in secondary markets because of bans on trading receivables. Moreover, stakeholders typically view these inflexible instruments as artificial transactions. Many Shariah experts had hoped they would be temporary solutions used in limited contexts where no other instruments could be developed, but lacking alternatives, they have persisted and become widely adopted in the industry.

New strategies to meet the liquidity management and personal financing needs of Islamic banks and Islamic windows at conventional banks are being developed. These products address both the operational needs of Islamic banks and the preferences of their customers and external stakeholders.

One of these products is the National Bonds Sukuk Trading Platform, which uses assets in the local economy to structure Shariah-compliant consumer financing. Its structure segregates the component transactions, which occur on a bilateral basis by the different parties, at different times, with no conditionality. It also provides this service with lower transaction costs than some of the alternatives in the market.

Abdulla Mohammed Al Awar, Chief Executive Officer of Dubai Islamic Economy Development Centre, said: “Since the launch of our leadership’s Dubai: Capital of Islamic Economy vision, we have been working with our stakeholders and strategic partners towards developing Islamic finance instruments and reinforcing the significant role of existing instruments such as sukuk in the growth of Islamic finance. As part of our efforts, we have also been supporting studies and researches that catalyse the development of the Islamic economy ecosystem.

“This report, which articulates such efforts, offers a detailed study on liquidity management through sukuk and highlights opportunities to incentivise the growth of Islamic finance and eventually facilitate the development of related sectors. We are confident this report will be treated as an authentic reference point for all stakeholders engaged in the growth of Dubai as the capital of Islamic economy.”

Mohammed Qasim Al Ali, Chief Executive Officer of National Bonds Corporation said: “In line with our strategy to nurture financial literacy in the UAE and offer efficient low-risk financial products, we are pleased to contribute to this report that provides the answer to a crucial question related to the efficiency of liquidity and stability of the financial sector as a whole. Moreover the report highlights the benefits of the significant role of Sukuk Platform in ensuring that liquidity and financing fulfil their main role through incentivizing economic growth and resolving financial challenges faced by SMEs and business leaders - while avoiding the risks that go hand in hand with conventional loans.” 

Nadim Najjar, Managing Director, Middle East and North Africa, Thomson Reuters said, “The Liquidity Management through Sukuk teaser is a highly engaging and dynamic study that inspires and excites Islamic finance stakeholders and professionals to assess the current liquidity management landscape and challenges. The Report also provides a comprehensive study on recent trends and developments in Islamic finance and Sukuk in the GCC region and beyond.”