Understanding Liquidity Management and Sukuk Markets
Comprehensive overview of liquidity management (LM), focusing on its importance, obstacles, and current tools like Sukuk. Explore how Sukuk can enhance liquidity management, especially in financial institutions, by matching maturities, maintaining sufficient funds, and dealing with short-term pressures effectively. Discover the key relevance of LM in financial stability and the potential risks of inadequate liquidity management in the banking system. Uncover primary obstacles faced in conventional banking frameworks and explore various LM tools like Interbank money markets and Sukuk modes.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
E N D
Presentation Transcript
Liquidity Management and Sukuk Markets Salman Khan
Liquidity Management Comprehensive overview to understand subject matter What is liquidity management (LM) Important to whom & why Obstacles to satisfactory LM & why (imp/storyline**) Current LM tools Sukuk and LM How can Sukuk help in better LM Challenges
Liquidity Management Liquidity management (LM) Important: liquidity risk Liquidity risk (LR): Risk arising from lack of marketability of an investment , security, or hard asset to cash at appropriate price w/o loss of capital/ Y /appropriate inability to sell Immediate needs Higher LR: value of assets/business Risky operation
Liquidity Management Specifically for financial institutions: Need to match Maturities Liabilities and assets Keep sufficient funds to meet financial commitments Related: ability to collect deposits Deal with short-run pressures relating to demands on the FI
Liquidity Management To whom Financial institutions (FIs) Corporates Businesses Institutional investors Sovereigns Individuals Most relevant: FIs
Liquidity Management Within context: ==> Financial institutions (key relevance) Majority of substantial problems: LM Relevant to overall financial stability Potential: collapse of banking system ==> Regulatory interest Crucial: to strengthen LM fr/w
Liquidity Management Key primary obstacle: Operating within conventional banking fr/w (IBF in general) Most LM tools? Interbank money market Secondary market financial instruments Discount window of central banks All? Challenge? Find SC LM tools Asset-based/other SC modes
Liquidity Management Main LM tools available at present: Commodity Murabaha (Tawarruq) Interbank deposits Wakala Mudaraba Musharaka Sukuk Malaysia: a) Mudarabah Interbank Investment (MII) b) Wadiah Acceptance c) Government Investment Issue (GII) d) Bank Negara Monetary Notes-i (BNMN-i) e) Sell and Buy Back Agreement (SBBA) f) Cagamas Mudharabah Bonds (SMC) g) When Issue (WI) h) Islamic Accepted Bills (IAB) i) Islamic Negotiable Instruments (INI) j) Islamic Private Debt Securities k) Ar Rahnu Agreement-I (RA-i) l) Sukuk BNM Ijarah (SBNMI)
Liquidity Management Main obstacles vis- -vis LM (using existing tools) Volume SC financial instruments Inter-bank dealings Secondary market Alternative to lender of last resort ? Sharia rulings < >
Liquidity Management Developing a secondary market Key tool at present: Commodity Murabaha (volume) Issues? Credentials (AAOIFI/IFA) Inefficient (fixed) Tradeable X (altho alternative used) Bursa Souq Al Sila (Malaysia) Projected alternative to LME (CM) - Commodity trade Issues: Commodities irrelevant Cash exchange Vis- -vis CM?
Liquidity Management Currently: separation Malaysia / Rest of the world
Liquidity Management Malaysia: Regulatory & legal infrastructure very well developed Accounts for over 60% of all sukuk issuances Market s average annual growth of 15% over last decade Market largely local/insular Some change recently Saudi sukuk issue (RM 200m, Al Bayan) Govt now actively encouraging foreign sukuk issuers However: noteable difference in Sharia rulings Many of which facilitate sukuk structuring and trading Related: Sharia credentials; debt trading; Ina
Liquidity Management How can Sukuk help? Sukuk LM Sukuk issuance: Large volumes, upward trend 110 (2014), 125*(2015), 250*(2020) LM solved? Understand: Primary vs secondary Primary: LT pb/pv (mainly individual LM) Secondary: LM Primary ; secondary? Secondary Figures in USD billions; * Projected
Liquidity Management How can Sukuk help? Emphasise - KEY: =>Tradeability of Sukuk, i.e. development of secondary market Issuance alone X Trading Many associated issues
Liquidity Management How can Sukuk help? Tradeability issues: Key: Buy and hold Why? Other options? Perceived good quality investment Ratchet effect: tradeability Spread between bid and ask too high Function of D&S Low volumes Malaysia exception: easy to trade (?)
Liquidity Management How can Sukuk help? Tradeability issues: Developing infrastructure for trading of Sukuk Developed financial markets: easier Expanding financial regulation cover Sukuk fully All aspects Taxation Default Why easier - proviso? (why? ABS v ABK)
Liquidity Management How can Sukuk help? Tradeability issues: Limited by structures (trade) Mudaraba, musharaka, Ijara Murabaha, Istisna, Salam Hybrid? (discuss) Sharia-credentials Global marketability/acceptability of existing ABS vs ABK: long term health/plausbility
Liquidity Management Salam Sukuk (Bahrain CB) Salam Sukuk: presently used Central Bank of Bahrain ST LM 91d Issues: Volume Tradeability: primary Synthetic?
Liquidity Management Salam Sukuk Salam Seller (Islamic Bank) (2) (3) Salam Agreement (1) (4) Investors (Sukuk holders) 3P Parallel Salam Buyer SPV (1 ) (4 ) Parallel Salam Agreement 1 Salam Sukuk issued 1 - Fund raising collecting proceeds from the investors 2 Cash transferred to Salam Seller 3- Goods (commodities) are delivered at maturity 4- Goods delivered at maturity 4 - End buyer pays Sukuk proceeds + margin (to be redeemed to Sukuk holders) N.B.: Parallel Salam Agreement at outset, to sell commodities upon delivery in market on behalf of sukuk holders
Liquidity Management Developing a secondary market Secondary market: some endeavours to date Liquidity Management Centre (Bahrain, 2002) Facilitating investment of surplus funds of Islamic banks and financial institutions into quality short-and medium-term SC financial instruments Shareholders: Bahrain Islamic Bank Dubai Islamic Bank Islamic Devt Bank Liquidity Mgmt House Not very active (recent years) Still has comp-ad over Malaysia (vis- -vis Europe)
Liquidity Management Developing a secondary market International Islamic Liquidity Management Corporation (IILM) (Malaysia, 2010) Established by central banks, monetary agencies and multilateral organisations to introduce and facilitate effective cross-border SC liquidity transactions Debut Sukuk: USD 490m (Aug 2013) Aim: current LM products (CM/Salam) will be replaced by IILM s ST sukuk Potential benefits Currently: much to do Sukuk trading: Malaysia Shareholders Bank Indonesia Central Bank of Kuwait Islamic Development Bank Banque Centralle de Luxembourg Bank Negara Malaysia Bank of Mauritius Central Bank of Nigeria Qatar Central Bank Central Bank of the Republic of Turkey Central Bank of the UAE
Liquidity Management Points to ponder Primary issuances (also LM) Equity vs debt (relevant to discuss) Theoretical attraction of sukuk What is it? Discuss
Liquidity Management Points to ponder Primary issuances (also LM) Equity vs debt Debt Majority New participants(SA, HK, Jpn, Ire, Kzk, Brm, Frn, Chn, Ind, Aus, Afr x) Conventional sources? Gulf liquidity: xs paradigm of debt demand and supply : perils Linked to ABS vs ABK Solution: Equity sukuk Opinion?
Liquidity Management Points to ponder Primary issuances (also LM) Equity and debt Equity sukuk: Repeated: Potentially/theoretically huge scope for large projects (infrastructure devt; project finance) (covered in separate session) Effective LM tool for sovereigns, corporates, etc Savings X ABS v ABK Market stability Vulnerability
Liquidity Management Points to ponder Equity sukuk: Businesses: ST capital / LM requirements Inventory/goods/fixed assets Again: ABS v ABK Huge market/potential Key challenges: ABK Acceptability actual v proclaimed commanding heights Price Inventory/assets
