ADIB chief urges UAE to widen provision of short-term liquidity to Islamic lenders
The UAE should also offer longer-term funding facilities to Islamic banks so as to improve their business capability, said Tirad Al Mahmoud.
The Central Bank allows Islamic banks to park Sharia-compliant assets on its balance sheet in exchange for profit. This is only available on an overnight basis.
“The facility … would be enhanced if term funding was also offered,” said Mr Al Mahmoud.
The central banks of the UAE and Bahrain recently introduced a series of short-term treasury management tools to help Islamic lenders to manage their cash flows.
In April, Bahrain’s central bank introduced a week-long wakalah lending facility, which allows Islamic banks to invest in a basket of Sharia-compliant assets for seven days.
In the UAE, the Central Bank accepts a broader range of assets as collateral for its Sharia-compliant overnight lending facility, formally known as the Collateralised Murabahah Facility.
Bahrain and the UAE are the only countries in the region whose central banks offer liquidity tools to Islamic lenders.
Such banks typically trade more illiquid assets than conventional lenders, and very few Sharia-compliant liquidity management tools exist.
Non-Islamic banks use the short-term money market and central bank financing arrangements to meet their daily balance sheet shortfalls. As Islam forbids profiting from charging increments on cash, Islamic banks have had to adopt more complex methods of making their books balance at the end of each working day.
“We fully agree that stakeholders should introduce more Sharia-compliant short-term treasury tools,” said Mr Al Mahmoud.
“Treasury operations, specifically liquidity management for Sharia-compliant banks, have come a long way. Recent trends give us optimism about the future.”
Last month, the industry group, the UAE Banks Federation, considered proposals to introduce a unified Sharia board to regulate Islamic banks.
The standardisation of products and guidelines has long been an obstacle in developing the Islamic banking industry, according to analysts from the IMF and credit ratings agency Standard & Poor’s.
Differing applications of Sharia standards create scope for “regulatory arbitrage”, according to an IMF working paper published in April.
National regulators needed to strengthen and harmonise Sharia rules, said the IMF.
Today, Islamic finance leaders are meeting in London to discuss ways to help the sector grow further. The leaders include representatives from the Islamic Development Bank, the Government of Sharjah, and lenders from Kuwait, Britain and Malaysia.
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Updated: June 2, 2015 04:00 AM