I think there are some very interesting ideas proposed, not all of which are new, but which need to be repeated until they are addressed. In particular, I think that Neil Miller's comments on sukuk secondary markets should be a focus in liquidity management (as Ijlal Alvi mentioned when discussing the use of sukuk as collateral in tri-party repo). There are a lot of areas in the sukuk market that need development, and among the points that the summary describes from Neil Miller, the most important in my opinion is adding depth and breadth to the sukuk market (an issue I have discussed several times, including one rough estimate at the potential for sukuk issuance in the GCC if it reached the size relative to the economy as Malaysia, and if corporate issuers in the GCC became more active).
There can be little development in sukuk markets and in sukuk-backed repo transactions if there are not enough sukuk issued. In order to develop trading markets, there should also be a variety of sukuk (many different issuers, tenors, ratings, etc) to make it more worthwhile for investors to sell one type in order to buy another (to move from lower to higher quality, or from a longer to shorter maturity).
There are many thought provoking questions raised, even in the short article about the forum, but having the subjects revealed publicly should start many more discussions than the original press release will.
Solutions for Liquidity Management in Islamic Finance The Securities Commission Malaysia (SC) and the Oxford Centre for Islamic Studies (OCIS) organized the 3rd SC-OCIS Roundtable which was held at the Securities Commission, Kuala Lumpur on 12-13 March 2012. The theme for this year's Roundtable was 'Solutions for Liquidity Management'.
The Roundtable had three main sessions each comprising two presentations, two respondents and Questions & Answers and a Chairman. There was also an opening session with keynote speeches and a concluding session where Chairs summed up the proceedings of each respective session and made recommendations on 'Solutions for Liquidity Management' going forward.
The session topics included 'Reaching Consensus on Sukuk Trading'; 'Developing Participatory Instruments as Liquidity Tools'; and 'Commodity Murabahah and its Variants' respectively. For the benefit of MIFC Community members and EPICENTRE readers, this Briefing highlights the main issues and conclusions that were discussed during this closed-door Roundtable.
The Session on 'Reaching Consensus on sukuk Trading' saw two robust presentations - one by Neil Miller, Global Head of Islamic Finance, KPMG, Dubai, who highlighted several constraints in sukuk trading and suggested some solutions which would help overcome some of these constraints to achieve liquid markets; and the other by Ijlal Alvi, CEO, International Islamic Financial Market (IIFM), Bahrain, who proposed the use of sukuk as a form of collateral at both a domestic and cross-border level, and the development of a Three-party Islamic alternative to repurchase contracts (REPOs) based on the principle of l'aadat Al Shira'a - the lack of which is considered a major impediment in the development of an Islamic inter-bank market.
Neil Miller suggested several solutions for sukuk trading to develop further:
Ijlal Alvi alluded to various AAOIFI standards which allow for the addition of extra collateral. On this basis he suggested the use of sukuk as a form of collateral. He highlighted the following considerations:
- A need for a steady supply of liquid securities with different risk profiles and maturities - in other words more depth and breadth in the market;
- The emergence of cross-border liquidity framework;
- Greater integration of Islamic financial centres to promote a vibrant secondary market;
- A regulatory environment that promotes meaningful disclosure and transparency;
- The establishment of a bespoke trading platform to facilitate the listing and subsequent trading of a wide universe of sukuk and other Shariah-compliant instruments; and
- The inclusion of built-in controls in the proposed Platform to prevent the market from misusing the trading of sukuk or controlling junk sukuk trading.
The Session on 'Developing Participatory Instruments as Liquidity Tools' comprised presentations by M Iqbal Asaria, Associate Afkar Consulting Ltd and Visiting Faculty, CASS Business School, UK and Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters.
- Understanding the Shariah issues, for instance under the Shariah collateral must be in kept in a separate account;
- Taking security, where under the Shariah it is not possible to rehypothecate securities as practiced in conventional banking;
- Margin maintenance and accounting treatment; and
- The establishment of an International Triparty Agent which he said was essential to be developed in Islamic finance jurisdictions.
Iqbal Asaria warned against the debt-based market fundamentalism that spurred the growth of the West. Islamic finance grew within this debt based system, creating pressure for Islamic banks to replicate and mimic the conventional products. He questioned the current state of Islamic finance which is still plagued by lack of standardisation, continued use of Inah and Dayn, the growth of Tawarruq and Commodity Murabahah. There is little progress in cross-border liquidity and challenges relating to Basel III. He urged among others; Islamic finance should move towards equity oriented financing, Islamic finance should use the sukuk experience to develop and participatory instruments such as Corporate Musharakah Certificates.
Rushdi Suddiqi on the other highlighted the need for sophistication and efficiency in the commodity murabahah platform in the areas of such as news data , central counterparty clearing entity, greater use of electronic processes and the introduction of a screen-based platform for trading.
The session on 'Commodity Murabahah and its Variants' comprised presentations by Associate Professor Dr Said Bouheraoua, Chief Academic Officer and Dean, International Shariah Research Academy for Islamic Finance (ISRA) Malaysia, and from Khairul Nizam, Assistant Secretary General, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Manama.
The conclusions were that:
- Commodity Murabahah is acceptable to manage solutions in liquidity management of an Islamic bank despite varying Shariah views;
- AAOIFI recognises Tawarruq subject to pre-conditions and that regulated Tawarruq is an alternative such as the Bursa Suq al-Sila' platform;
- It is imperative to have mutual recognition on Shariah positions amongst jurisdictions to facilitate cross-border transactions to facilitate liquidity management;
- Liquidity management is intended to preserve the 'health' of the Islamic banking system that will allow Islamic banks to serve the society/public and this is consistent with the objectives of the Shariah (Maqasid al-Shariah); and
- There should be much greater cooperation and contact between market practitioners, Shariah scholars and economists in addressing the above issues.