Global Islamic Liquidity Management Report 2023

iilm.
com
Global Islamic
Liquidity
Management
Report 2023
Building a Robust and Resilient Ecosystem
2
Contents
Message from the International Islamic Liquidity
Management Corporation 4
Message from LSEG 6
Executive Summary 8
Introduction to Islamic Finance 12

Islamic Finance Overview 13
Liquidity Management Landscape 19

Liquidity Landscape and Recent Events 20
Liquidity Management Challenges for Islamic Financial Institutions 25
Key Liquidity Instruments 29

Liquidity Programmes and Instruments Issued by Central Banks 30
Islamic Interbank Placements 36
Islamic Repo Instruments 43

Islamic Repo Still Waiting For Take-Off To Cross Borders 44
Liquidity Risk Management by Islamic Financial Institutions 53

Basel III Requirements for Liquidity Management for Islamic Financial Institutions 56
International Islamic Liquidity Management Corporation’s

Role in Addressing Liquidity Management Needs 66
IILM Overview 67
IILM Key Milestones 68
The IILM Sukuk Programme Structure 72
Acronyms 78
Global Islamic Liquidity Management Report 2023 3
4
Message from
the International Islamic
Liquidity Management Corporation
The International Islamic Liquidity Management Corporation (IILM) is These insights are complemented with a study on the liquidity
proud to collaborate with the London Stock Exchange Group (LSEG) landscape in key Islamic finance markets, including an examination
to produce the Global Islamic Liquidity Management Report 2023: of the impact of recent events such as tightening monetary
Building a Robust and Resilient Ecosystem. The report represents policies, on the liquidity positions of Islamic financial institutions.
the IILM’s sustained commitment towards serving the Islamic Additionally, the report addresses main risk management
finance industry in addressing its liquidity needs. considerations for Islamic banks aligning with Basel III standards.
Liquidity management has been an ongoing concern for many The IILM was established to address the liquidity management
Islamic financial institutions and there have been initiatives by challenges faced by Islamic financial markets and as a response to the
central banks to provide institutions such as Islamic banks and heightened need to monitor liquidity risk. This report gains significance
asset managers with avenues to deploy their excess cash. To gain as we celebrate our 10-year anniversary since our inaugural short-
comprehensive perspectives from various key stakeholders, we term Sukuk issue in 2013, showcasing a decade-long track record
have conducted exclusive interviews with central banks, Islamic in this domain. In 2023, cumulative international Sukuk issuances of
DR. UMAR OSENI finance standard-setters as well as Islamic and conventional US$11.52 billion and cumulative issuance of US$100.94 billion since
banks. These interviews provide much-needed focus on key inception, the IILM stands among the top global international Sukuk
CHIEF EXECUTIVE OFFICER, issues in Islamic liquidity management from the perspectives issuers. The final chapter of the report delves into how the IILM and
THE INTERNATIONAL ISLAMIC of these industry stakeholders. The key issues identified include its Sukuk programme seamlessly integrate into the broader liquidity
LIQUIDITY MANAGEMENT CORPORATION limited Shariah-compliant instruments, inconsistent regulatory management landscape of the Islamic finance industry.
frameworks, infrastructure challenges and variations in Shariah
opinions. Addressing these concerns, they have also offered We are confident that the insights presented in this report will
solutions and suggestions for improvements. contribute towards fortifying the Islamic finance industry.
The report also explores key liquidity management instruments

serving the global Islamic finance industry across key and nascent
markets, whether issued by their respective central banks or
through alternative means. Special attention is given to Islamic
repurchase agreements (repos) through case specific studies in Dr. Umar Oseni
key Islamic finance markets accompanied by essential Shariah and CEO, The International Islamic
regulatory considerations in structuring such instruments. Liquidity Management Corporation
Since its inception in 2010, the IILM has been dedicated to fortifying the
underlying ecosystem of the Islamic finance industry. This commitment is
embodied in the development of its cross-border Sukuk programme tailored to
address the liquidity requirements of Islamic financial institutions.
As 2023 draws to a close, the global financial industry grapples in meeting industry requirements as well as their perspectives on
with heightened stress due to a range of diverse factors. The necessary steps to address existing challenges.
H.E. PERRY WARJIYO banking crisis during the first quarter of 2023 affecting the United
States and Europe reverberated across global markets. The In navigating the post-COVID-19 era and responding to the U.S.
CHAIRMAN OF THE IILM GOVERNING resonance was felt profoundly when real estate funds suffered Federal Reserve’s tightening monetary policy, the IILM remains
BOARD IN 2024 withdrawals amid rising interest rates, adversely impacting resolute in its commitment to serve the Islamic finance industry,
property valuations and underscoring the critical importance of leveraging its decade-long track record.
GOVERNOR, BANK INDONESIA
robust liquidity management.
In the face of uncertainties, the IILM continues to explore innovative
Islamic financial institutions were not spared from such events, tools to address the industry’s evolving liquidity management
as seen in the case of the “bank run” that affected Islamic banks needs. The most recent initiative, the one-year international Sukuk,
in Bangladesh in 2022. These events underscore a pressing need is a testament to this commitment, strategically aligned with the
for the development of effective liquidity management solutions. rising market demand.
They also serve as stark reminders that weak liquidity buffers can
With the release of this report, we aim to catalyse further
heighten vulnerabilities to deposit runs, emphasising the imperative
innovation and initiatives in Islamic liquidity management, fostering
of prudential oversight.
resilience and sustainability in the ever-changing
Since its inception in 2010, the IILM has been dedicated to financial landscape.
fortifying the underlying ecosystem of the Islamic finance
industry. This commitment is embodied in the development of its
cross-border Sukuk programme tailored to address the liquidity
requirements of Islamic financial institutions. As expounded in
this report, Islamic finance participants seek high-quality Shariah-
compliant liquid assets, which are in demand as reflected in the
oversubscription rates of various IILM Sukuk issues. H.E. Perry Warjiyo
The report, featuring insights from leading industry stakeholders, Chairman Of The IILM Governing Board In 2024
sheds light on their evaluation of current instruments’ effectiveness Governor, Bank Indonesia
6
Message from
the London Stock Exchange Group
The global Islamic finance industry may be on an impressive The “Global Islamic Liquidity Management Report 2023: Building
growth path—assets increased by 11% to US$4.5 trillion in 2022 a Robust and Resilient Ecosystem” is the first-of-its kind study.
and we expect this figure to surpass US$6.7 trillion by 2027—but It covers the current market landscape and market size, the role
liquidity management remains a perennial issue. of central banks and key liquidity programmes, and the role of
the IILM Sukuk programme to address the industry’s liquidity
A set of factors collectively hinder the growth of Islamic liquidity management needs.
management solutions that are both authentic to Islamic
principles and commercially viable. We have found that some of What also makes this report exclusive is that we also provide
these barriers include unsupportive national regulations, Shariah a snapshot of industry views via case studies and exclusive
compliance issues, a lack of standardisation, the small number of interviews with key participants of the industry, whether Islamic
market players such as Islamic banks, and limited Sukuk supply in financial institutions, regulators or other stakeholders, on different
some regions. topics including liquidity challenges, solutions, perspectives on the
IILM Sukuk programmes and AAOIFI standards.
While there are instruments available for Islamic liquidity management,
such as Wakala and Commodity Murabaha in some markets, their
Mustafa Adil MUSTAFA ADIL
HEAD OF ISLAMIC FINANCE
utility is limited due to the lack of depth in these jurisdictions’ Islamic
THE LONDON STOCK EXCHANGE GROUP
interbank markets, Commodity Murabaha’s tradability, and the
unresolved issues surrounding their level of Shariah authenticity.
To address these challenges and provide an updated picture of Mustafa Adil

Islamic liquidity management, we have worked with the IILM, a
Head of Islamic Finance
leading stakeholder in this area, to develop what we hope is a
The London Stock Exchange Group
meaningful report for the industry.
8
Executive Summary
Heightened importance of liquidity management for the Recent global macro developments are also putting pressure on liquidity. Demand-supply
mismatches during the post-Covid recovery was met with geopolitical conflicts that put
Islamic finance industry upward pressures on inflation, resulting in central banks tightening their monetary policies.
The global Islamic finance industry is projected to grow to US$6.7 trillion in assets by In turn, banks are facing increasing costs of funding that are impacting their liquidity
2027. This development is significant in the light of tightening monetary policies in most positions. This has also heightened the importance of strong liquidity management for
jurisdictions since 2022 and an expected global economic slowdown. After a string other financial institutions such as asset managers as indicated by the fund withdrawals
of springtime banking failures that made headlines this year, liquidity management is for property funds based in Europe following the depression of property valuations after
becoming more important for financial institutions. the rise in interest rates.
For the Islamic finance industry, the dearth of Islamic liquidity management instruments Range of tools available for Islamic liquidity management,
has been a constant challenge despite the industry’s growth and maturity in some regions yet challenges remain
of the world. The liquidity level for the biggest Islamic banks in top Islamic finance markets
averaged 12% in 2022, as indicated by their share of liquid assets to total assets. This The Islamic finance industry has seen positive signs and progress with the introduction
average is the same as conventional banks in the same markets. of new tools to manage liquidity in many markets and it is clear that the development of
liquidity instruments by authorities such as central banks serve as an integral component
Both conventional and Islamic banks behave similarly in their split between the components in the overall advancement of the Islamic financial industry.
of liquid assets: most of their liquidity are held in cash that are low-return, high-quality liquid
assets (HQLA) used to meet Basel III requirements. For Islamic banks especially, these are From our study of the global Islamic finance industry for this report, central banks continue
the preferred methods to manage liquidity because placements in other institutions do not to issue tradable instruments that work for monetary policy practice while facilitating
meet the HQLA criteria as interbank deposits are subject to counterparty risk. liquidity management for Islamic banks. These instruments range from Sukuk and Islamic
deposit accounts to standing liquidity facilities. The development of such instruments
Different liquidity situations prevail across markets. While it has been more or less “business can be found in the biggest Islamic finance markets as well as in some nascent ones. We
as post-pandemic usual” in most places, in Saudi Arabia, banks are adjusting their positions discuss this in the chapter addressing ‘Key Liquidity Instruments’. However, what we have
as the government continues to channel oil receipts away from them and into the sovereign also found is that despite these developments, short-term Sukuk by governments are
wealth fund for strategic investments and in Bangladesh, some Islamic banks were hit in limited in supply and central bank facilities carry low yields.
2022 by a “bank run” that was triggered by negative reports about their practices.
The global Islamic finance industry is projected to grow to US$6.7 trillion in assets
by 2027. This development is significant in the light of tightening monetary policies
in most jurisdictions since 2022 and an expected global economic slowdown.
In the money markets, Islamic interbank instruments and Islamic repurchase agreements The IILM addresses the liquidity needs of Islamic finance markets
(repos) are also available but they are not without their challenges. There is currently no
one Shariah-compliant structure or contract that the industry agrees on for cross-border Considering the different liquidity challenges facing Islamic financial institutions domestically
transactions largely because of a lack of Shariah consensus. Islamic financial institutions and across borders, the IILM was established in 2010 by central banks and a multilateral
in most markets have been slow to take advantage of Islamic repos despite efforts to organisation to address the creation and issuance of high-quality Islamic liquidity instruments.
revamp the instrument through documentation by industry bodies and the introduction
of new instruments in some markets. However, there are promising developments, as The organisation has a proven 10-year track record since its first Sukuk issue in 2013, with 234
we highlight in the chapter on ‘Islamic Repo Instruments’, that may be able to support Sukuk issues reaching a value of US$100.94 billion up to December 2023. The IILM Sukuk have
the growth of the industry as it internationalises. But even as we speak of some markets played an important role in shaping the global Sukuk industry and according to LSEG, the IILM
driving the growth of Islamic finance beyond their domestic businesses, there are still is ranked among the top Sukuk issuers globally, especially in terms of international issues. The
shallow Islamic interbank markets in countries with low numbers of Islamic banks. IILM Sukuk also has a significant impact in the supply of HQLA Islamic liquidity tools as it is
considered one of the limited amount of Sukuk that can be considered globally. There are several
Across all of these markets, Islamic lender of last resort facilities are also important to reasons for the popularity of IILM Sukuk. The IILM’s Wakala Sukuk structure is well-designed to
meet the liquidity management needs of Islamic banks in times of stress. Yet, there is an meet market needs with the highest tangibility ratio of 79%. This makes it tradable and compliant
absence of lender of last resort facilities in many jurisdictions. This has resulted in some with AAOIFI standards and widely accepted globally. The IILM Sukuk programmes’ asset portfolio
banks holding high levels of liquid assets. From our analysis of the top Islamic finance is backed by Shariah compliant assets originated from sovereigns, government-related entities
markets, we see that while the Islamic banks comfortably meet Basel III Liquidity Coverage and supranational entities that are highly rated.. As a result, the IILM Sukuk are always very well-
Ratio (LCR) and Net Stable Funding Ratio (NSFR), some markets have shown excessively subscribed by a diverse pool of global investors, not only Islamic, but also conventional investors.
high LCR, which points to lower returns from a higher level of undeployed funds. This
is why there have been instances of regulators such as the State Bank of Pakistan Given the growing importance of IILM Sukuk issues to the industry, the organisation has
concentrating on a liquidity management framework in its 2021 to 2025 Strategic Plan for responded by introducing new tenors, with the 1-month in 2019 and the latest being the
the Islamic Banking Industry. 1-year Sukuk that debuted in June 2022. It was released when issuances were slowing
as market participants waited for central banks to respond to high inflation rates that
It is clear that despite progress and developments, the industry is still in need of deep and prevailed at the time. The introduction of longer tenor Sukuk has been also addressing the
active markets for interbank placements and liquidity instruments. needs of central banks for HQLA Islamic securities to back their offering of Islamic liquidity
instruments in their local currencies (securitisation through Wakala short-term issuances
or deposits). The 1-year Sukuk will help build a benchmark yield curve up to 12 months to
address the different liquidity needs of Islamic banks and other institutions globally.
10
Executive Summary (cont.)
Islamic Liquidity Management Tools
Islamic Deposit Account Standing Liquidity Facility Sukuk and Instruments Islamic Interbank Islamic Repurchase Lender of
with Central Banks with Central Banks Based on Securitisation Market Agreements Last Resort
Challenges Facing Islamic Liquidity Management
Limited Shariah-Compliant Shallow Secondary Inconsistent Regulatory Lack of Interbank Market Infrastructure Shortage of
Instruments Market Frameworks and Counterparties Market Players
Shortage of Shortage Shariah Compliance Zero or Lower Fragmentation of the Currency and
Sukuk Supply of HQLAs Complexities Return Facilities Islamic Finance Industry FX Risk
Solutions to Address Islamic Liquidity Management
Standardisation and Harmonisation of Diversification of Islamic Enhanced Market Capacity Building, Education
Regulatory Treatment and Frameworks Liquidity Management Tools Infrastructure and Communication
Push by Regulators and Monetary Authorities Shariah Standardisation Use Other Structures for International Collaboration
to Supply HQLA Islamic Tools and Harmonisation Lender of Last Resort and Industry Bodies
IILM Snapshot
Total Issuance Amount Since Inception

Tool Used Primary Objective
(2013 – 2023)
Sukuk Issuance based on Wakala Structure. Provide Shariah-compliant financial instruments

234 Sukuk issues of total value of US$100.94 billion
Fully-compliant with AAOIFI Standards for effective cross-border liquidity management
IILM Sukuk Issues Nature of Investors

(USD Billion, 2019 – up to end 2023) (As of November 2023)
16.00 120.00
14.12 13.88 Takaful
14.00
100.94 220
100.00
11.95 11.52
12.00
89.42
80.00
10.00 75.54
9.03
8.00 61.42 60.00
49.47
6.00
40.00
4.00
20.00
2.00
0 0
2019 2020 2021 2022 2023
12
Introduction
to Islamic
Finance
Islamic Finance
Overview
Sustained growth momentum by the global Islamic finance industry banking in many parts of the world. Sukuk also plays an important role in shaping the
industry. The use of Sukuk gained momentum in the last few years as more sovereigns and
The modern Islamic finance industry emerged in the mid-1970s when new banks started corporates started showing interest and subsequently issuing more of the instrument.
providing Shariah-compliant products in response to the pan-Islamic zeitgeist.
However, not all Islamic finance asset classes have consistently recorded growth. Islamic
In the past decade, the industry recorded strong growth, expanding by 163% in assets from funds’ assets under management dropped in 2022 largely due to the hit to funds investing in
2012 to 2022 according to the ICD-LSEG Islamic Finance Development Report 2023 (IFDI equity as a result of the global economic slowdown that followed the rise in interest rates. This
2023). Global Islamic financial assets also rose by 11% to US$4.5 trillion in 2022 from 2021. also impacted the investment performance of some Islamic banks and Takaful operators.
The biggest contributor to the growth of Islamic finance is the Islamic banking sector that Despite these bumps, the industry is expected to continue on its growth trajectory as many
in 2022 accounted for 72%, or US$3.2 trillion, of total global industry assets. Among the countries include Islamic finance in their finance roadmaps or economic strategies and
factors contributing to the growth of the Islamic banking sector is its operational efficiency strengthen their supporting ecosystem, as indicated by IFDI 2023. The industry is projected
and its partnerships with FinTechs in recent years, as well as the high demand for Islamic to grow to US$6.7 trillion by 2027.
Islamic Finance Assets Growth Islamic Finance Assets

(2016 – 2022, USD Billion) (2022, USD Billion)
6,667
4,066 4,508
3,487
2,667 3,029
2,409 2,564
2016 2017 2018 2019 2020 2021 2022 2027

Projected
Source: ICD – LSEG Islamic Finance Development Report 2023

14
Islamic Finance Overview (cont.)
Islamic finance seen developing around the world

Over 1,850 Islamic financial institutions operate in 90 countries. According to IFDI 2023, the
largest Islamic finance markets are based in the GCC, Southeast Asia and South Asia. Sukuk
outstanding are held in 29 countries while Islamic funds are managed by asset managers
based in 28 countries. The industry is heavily concentrated in the top markets: the top five
countries account for 82% of total global assets and the top ten countries are home to 95%
of total industry assets. The highest growth during 2022 is in the regions that only recently
started adopting Islamic finance, such as Sub-Saharan Africa and Central Asia.
Among the ways to strengthen the Islamic finance ecosystem is the introduction of
regulatory measures to govern some sectors and asset classes of the industry. This can be
seen in the 56 countries that have at least one Islamic finance regulation covering its sector
or asset classes such as Islamic banking or Sukuk. The global industry ecosystem is driven
and supported by over 1,300 Shariah scholars who represent Islamic financial institutions
in 54 countries. 20 countries have centralised Shariah boards.
Among the other important indicators of the development of the Islamic finance industry
is the availability of Islamic liquidity management instruments, which has been a challenge
throughout the industry’s history. Relatively few instruments are able to meet the industry’s
needs and this will be explored throughout the rest of this report.
Introduction to Islamic Finance

Top Countries in Islamic Finance Assets

TopUSD
(2022, Countries
Billion) in Islamic Finance Assets Islamic Finance Industry and its Supporting Ecosystem in 2022
(2022, USD Billion)
Financial Performance
1,522
1,017
Total Islamic Finance Assets YoY Growth of IF Assets Islamic Financial Institutions
USD 4.5 Trillion 11% Over 1,850
666 Governance
277
Countries Islamic Finance Countries with Central Number of Shariah

Regulation Shariah Committee Presence Scholars
208 56 20 Over 1,300
Source: ICD – LSEG Islamic Finance Development Report 2023

16
Interview with
Islamic Development Bank
H.E. DR. MUHAMMAD From your perspective and given your market interactions,
AL JASSER what do you consider to be the current state of Islamic liquidity
CHAIRMAN, ISLAMIC DEVELOPMENT
management solutions in the Islamic finance industry?
BANK (ISDB) GROUP
Historically, liquidity management in Islamic finance has faced significant challenges
because of the limited options of Shariah-compliant instruments. In response, industry
players have developed various solutions to address these challenges. The Islamic
Development Bank (IsDB) is leading the innovation and promotion of Islamic finance
worldwide. Here are some major aspects of the current state of Islamic liquidity
management solutions:
• Commodity Murabaha and Wakala are among the most popular Islamic liquidity
management tools. They have emerged as effective money market instruments that
Dr. Muhammad Al Jasser assumed office as Chairman of the Islamic Development Bank many Islamic financial institutions use to manage short-term liquidity in compliance
Group on August 9, 2021. Before that, he served as the Minister of Economy and Planning
with Shariah principles.
and Governor and Board Chairman of the Saudi Arabian Monetary Agency (now the Saudi
Central Bank (SAMA)). Prior to that, he was an Executive Director at the International The two products are the Islamic alternatives to conventional interbank money market
Monetary Fund. He has extensive leadership experience in the public and private sectors,
deposits. They are straightforward and simple to execute. The IsDB has been spearheading
having held senior positions in several institutions.
these products for about four decades.
Dr. Al Jasser holds a PhD in economics and a master’s degree in economics from the
University of California and a bachelor’s degree in economics with honours from
San Diego State University.

Historically, liquidity management in Islamic finance has faced significant challenges

because of the limited options of Shariah-compliant instruments. In response,
industry players have developed various solutions to address these challenges.
Currently, our Bank has expanded the Commodity Murabaha Deposits business in Europe, As a multilateral institution that engages with entities across
Africa, the Americas, Australia and Asia. Over the years, the IsDB has signed agreements in
major conventional financial hubs, including London, New York, Singapore and Paris.
markets, in your opinion, what are the main concerns of Islamic
banks and related institutions about the current Islamic liquidity
• Islamic financial market participants and players have been dynamic to better address
management landscape?
the challenges in liquidity management and regulatory requirements. The International
Islamic Liquidity Management Corporation (IILM)’s innovative short-term Sukuk From our interactions in the global financial market, we understand that the concerns of
programme has been greatly supporting the liquidity management needs of the Islamic Islamic banks and related institutions regarding liquidity management essentially revolve
financial industry. The frequency and various securities issued by the IILM are helping around the following issues:
banks and other financial institutions address key financial ratios, such as the Liquidity
Coverage Ratio (LCR). • Limited Shariah-Compliant Instruments: We acknowledged earlier that we need to do
more to create more instruments and push innovative ones in the market. Islamic banks
• Market participants have also devised the “Islamic Repo” (also referred to as need more Shariah-compliant instruments to manage their liquidity effectively. However,
Collateralised Murabaha) to act as a liquidity management instrument in the industry. the availability of suitable tools is often very limited, yielding suboptimal results. Therefore,
This is a Shariah-compliant alternative to the Conventional Repo instrument. The Islamic we see this lack of diversity as a major concern for Islamic banks.
Repo market has also been a vibrant liquidity management platform for Islamic financial
institutions. In simple terms, Wakala transactions are money market placements • Shallow Secondary Market: Islamic liquidity management is also hindered by the relatively
transacted among Islamic financial institutions. shallow secondary market. A deep, vibrant secondary market is crucial for the efficient
management of liquidity; hence, the current situation, where the secondary market lacks
• Other liquidity management tools available in the Islamic financial sector include Islamic depth, poses a challenge for Islamic banks.
Commercial Papers and Islamic Certificates of Deposits. Many banks are intensively
using these instruments as part of their liquidity management.
18
Interview with Islamic Development Bank (cont.)
• Inconsistent Regulatory Frameworks: One of the most intractable challenges faced by • Diversification of Islamic Liquidity Management Tools: Efforts should be made
Islamic banks seeking to operate across multiple borders is the lack of uniformity in to expand the range of Shariah-compliant instruments available for liquidity
regulatory regimes. It is not unusual to find two or more countries with different – and management. This can be achieved through product innovation and the introduction
sometimes even inconsistent – regulatory frameworks. This lack of standardisation in of short-term instruments, interbank facilities, and money market instruments
regulations and practices across jurisdictions creates uncertainty and complexity for tailored to the needs of Islamic financial institutions.
Islamic banks operating in multiple markets.
• Enhanced Market Infrastructure: Developing a well-functioning secondary market
• Lack of Interbank Market Infrastructure: Islamic banks often rely on interbank markets for for Islamic financial instruments is crucial. Measures such as creating liquidity
liquidity management purposes. However, in comparison with the conventional banking facilities, encouraging market makers, and promoting electronic trading platforms
system, the infrastructure for interbank transactions and liquidity management in the can help enhance liquidity and tradability. Building robust infrastructure will attract
Islamic finance industry is not well-developed. This can limit the effectiveness of liquidity more participants and facilitate efficient liquidity management.
management strategies and increase costs for Islamic banks.
• Capacity Building and Education: Strengthening the knowledge and expertise
• Currency and Foreign Exchange Risk: Islamic banks operating in multiple jurisdictions of market participants, regulators, and Shariah scholars is essential. Training
face currency and foreign exchange (FX) risk when managing their liquidity. Fluctuations programmes, workshops and educational initiatives should be conducted to deepen
in exchange rates can impact the stability and profitability of their liquidity management understanding of Islamic liquidity management principles and practices. This will
activities. Managing these risks while adhering to Shariah principles can be a concern for help ensure effective implementation and compliance across the industry.
Islamic banks.
• International Collaboration: Encouraging collaboration and knowledge-sharing
How are some of the challenges related to Islamic liquidity among Islamic finance jurisdictions can accelerate the development of liquidity
management capabilities. International forums and platforms should be utilised to
management holding the industry back, and what needs to be
exchange experiences, discuss challenges and identify common solutions.
done to address these concerns?
To address the aforementioned challenges and concerns and promote effective and
efficient Islamic liquidity management, several steps can be taken:
• Standardisation and Regulatory Frameworks: Regulators and industry bodies

should work towards developing standardised liquidity management frameworks
and guidelines. This would help create a common understanding of best practices
and facilitate consistency across jurisdictions. Collaboration among regulators and
standard-setting bodies is essential for promoting uniformity in Shariah-compliant
liquidity management practices.

Liquidity
Management
Landscape
19
20
Liquidity Landscape
and Recent Events
Cash and balances constitute the biggest share of liquid assets for bank balances that are low-return, high-quality liquid assets (HQLA) used to meet Basel III liquidity
requirements. These are the preferred methods to manage liquidity because placements in other
conventional and Islamic banks to meet HQLA requirements institutions do not meet the HQLA criteria as interbank deposits are subject to counterparty risk.
Interbank deposits are not considered as Level 1 HQLA and so they face a counterparty risk.
When it comes to liquidity, the biggest worry for Shariah-compliant banks in the main
Islamic finance markets is investing their excess liquid funds with sufficient yields. In this A point of difference in some markets is that conventional banks hold fewer liquid assets (defined
regard, Islamic banks share the same concern as conventional banks. Yet, conventional by the items in the chart below) to total assets as they include Treasury bills while the options for
banks separate asset-liability management, treasury and investment desks while Islamic such instruments are limited for Islamic banks as Treasury bills are not Shariah-compliant and
banks mostly focus on yield than liquidity. Analysing the share of liquid assets to total hence cannot be used by Islamic banks. In addition, regulatory liquidity requirements for Islamic
assets for a sample of top banks in the biggest Islamic finance markets*, both Islamic and banks are lower than for conventional banks in some countries such as Bangladesh. This is
conventional banks have a share of 12% as a global average. partly due to the limited availability of Islamic liquidity instruments. The IILM has been increasing
its supply to address these specific needs. However, the lack of harmonisation on Level 1 HQLA
The Islamic and conventional banks also behave similarly in the split between the components of assets with 0% risk-weight prevents Islamic banks in certain jurisdictions to hold more of the
liquid assets such as cash and balances along with placements. They stand at an average of 65% IILM Sukuk. A cap of maximum amount of the instruments the banks can hold is determined
cash and 35% placements globally. Most of their liquidity is held in cash, central bank and other depending on the local regulator as a regulatory treatment of Level 2A/2B assets.
Liquidity and Interbank Placements for Banks in Top Islamic Banking Markets*
(Average Share of Liquid Assets, 2022)
40%
31% 29%
30% 28% 26%
less
than
20% 15%
15% 10% 11% 12% 12%
10% 6% 7% 5%
0%
0%
Source: LSEG Analysis. *The sample uses top five conventional and Islamic banks in each country. The top Islamic Malaysia, Oman, Pakistan, Qatar, Saudi Arabia, Türkiye and the UAE. Coverage of liquid assets is limited to cash and
finance markets represent 95% of total global Islamic finance assets: Bahrain, Bangladesh, Indonesia, Kuwait, placement with other financial institutions. **Cash is not always reported as a separate item as some banks reported
cash and balances with central bank together, others reported cash with balances with banks.
Liquidity Management Landscape

Different market situations, different liquidity levels receipts to its sovereign wealth fund, the Public Investment Fund (PIF), than to the banking
sector in order to spur strategic investments. Saudi banks also saw a rapid growth in lending
The unique situations of each country determine how much liquidity their banks hold. that led to liquidity constraints in 2022. With oil prices remaining high, banks will rely on non-
Compared to Shariah-compliant banks in other markets, Islamic banks in Türkiye, referred oil sector activities to create opportunities for corporate lending. However, with the rise of
to as participation banks in the country, hold the biggest proportion of liquid assets to interest rates, other segments for lending, such as mortgages, may see slowed growth.
total assets, most of which are cash and balances. The Turkish banking sector is reliant
The proportion of liquid assets to total assets for conventional and Islamic banks in Saudi
on external funding. What this means for the sector is that the rise of interest rates could
Arabia in 2022 was 9% and 8%, respectively. With the exception of Oman, this is lower than
potentially underpin a liquidity crunch. At a time of high domestic inflation, negative market
for banks in the rest of the GCC. Both Islamic and conventional banks in Saudi Arabia have
sentiment could force an outflow of investor capital and impact Turkish banks. Hence,
cash and balances holdings that are on average over 70% of total liquid assets but Islamic
such banks hold more liquid assets as a buffer.
banks have a higher proportion of cash holdings compared to conventional banks. As for
In Saudi Arabia, the largest Islamic banking market in the GCC, liquidity in the banking sector placements, both Murabaha and Wakala are the most used forms of interbank placements
is becoming less abundant after the Saudi government started channelling more of its oil in Saudi Arabia, as is the case in most Islamic finance markets.
Share of Liquid Assets to Total Assets for Banks in Top Islamic Banking Markets*
(Average, 2022)
25% 24%
22% 21%
20% 19% 19%
16% 17%
15% 13% 12% 13% 12%12%
11% 10%
9%
10% 8% 8% 8% 9% 9% 8%
7% 6%
5%
5%
0%
Source: LSEG Analysis. The sample uses top five conventional and Islamic banks in each country. Coverage of liquid assets is limited to cash and placement with other
financial institutions. *The top Islamic finance markets used represent 95% of total global Islamic finance assets, excluding Iran.
22
Liquidity Landscape and Recent Events (cont.)
Recent events highlight importance of liquidity management for rates that depressed property valuations. Some fund managers struggled with redemption
requests that they were forced to delay. This came as regulators called for a clampdown on
Islamic asset managers commercial property funds to prevent a liquidity crisis.
For the asset management industry, liquidity needs to be managed effectively as With regards to asset allocation of Islamic funds of different universes (mutual funds, pension
investors must have the option to withdraw their investment funds whenever required funds, Takaful funds and exchange traded funds) the average share of funds allocated to
and at accurate prices that reflect their value. For this to happen, holding sufficient cash cash is 15%, but deposits form the largest average share of the liquid assets. Asset managers
and HQLAs can accommodate inflows and outflows instead of having to transact the allocated 47% on average to Sukuk (some of which are Islamic Treasury bills) as some of these
underlying portfolio of assets. Poor liquidity management of assets poses a risk for market Islamic funds are more focused on fixed income investments. Other Islamic funds that have
stability and investors, which may lead to regulatory intervention. top holdings in Sukuk focus on mixed assets or money market investments.
The financial industry was again reminded of the need for solid liquidity management when It is worth noting that with regards the top holdings of the Islamic funds, 13% of these funds
in early 2023 fund withdrawals affected some property fund managers in Europe after have liquid assets such as cash, deposits, placements or money market as their top holdings.
investors became worried about market conditions such as the rise in inflation and interest
Average Asset Allocation by Islamic Funds

(Percentage Share, H1 2023)
70% 65
60%
52
50% 47
42
40%
30% 28
25
20% 16 15
10%
0%
Source: LSEG Lipper covering 1,411 Islamic funds that have reported asset allocation breakdown. Others include commodities, real estate and others.

Monetary policies impact effective liquidity management, their excess liquidity to work. This will increase the cost of funding for banks, thus reducing
their profitability, and impacting their liquidity.
especially for Islamic banks
For this, banks need to effectively manage their liquidity risk and maintain suitable liquidity
Different post-Covid events that hit markets, such as the increase in oil prices and interest positions. Banks need only look as far back as March 2023 to the collapse of Silicon Valley
rates, were accompanied by specific impacts in countries like Türkiye and Saudi Arabia Bank and Credit Suisse to be reminded that they need to manage interest rates and liquidity
as mentioned earlier. These have impacted the overall liquidity of Islamic banks in these in a more integrated manner. In addition, interest rates determine the money supply that
markets given the result of changes in the sources of liquidity such as deposits, as well as will impact the amount of savings deposited in banks.
uses of liquidity such as financing.
For Islamic banks, the benchmark rates they use to determine the margin and profit-
Responding to rising inflation—triggered by the soaring energy prices following the Russian sharing rates in financing and deposit products are influenced by the broader interest
invasion of Ukraine and re-opening of economies following Covid lockdowns—governments rate environment. Deposits that are based on profit-sharing by Islamic banks cannot
raised interest rates. In the GCC, the largest Islamic banking region, central banks’ ability offer a fixed rate on deposits whose profits are paid out monthly or annually. This could
to control monetary policy is limited as they track the US Federal Reserve’s policy rate make deposits offered by conventional banks more attractive compared to Islamic banks
because their currencies are pegged to the US dollar. This means that uses of liquidity, when interest rates are high, particularly for consumers who are indifferent to the Shariah
such as to provide financing, will drop as costs rise for clients, while funds will migrate to compliance of their banking services. This poses an additional challenge for Islamic banks
term deposits instead of current and saving accounts as retail and corporate clients put that need to increase their sources of liquidity.
US Federal Reserve Target

(2013 – 2023)
0
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-18
Jun-18
Oct-18
Feb-19
Jun-19
Oct-19
Feb-20
Jun-20
Oct-20
Feb-21
Jun-21
Oct-21
Feb-22
Jun-22
Sep-22
Feb-23
Jun-23
Sep-23
Feb-17
Jun-17
Oct-17
Source: LSEG Workspace

24
Liquidity Landscape and Recent Events (cont.)
Limited impact of transition to Risk-Free Rates on Islamic institutions from various jurisdictions said that liquidity is among the major risks that the
Islamic banking industry might face when shifting to RFRs. The lack of proper pricing will
financial institutions’ liquidity due to low exposure to LIBOR lead to wrongly accounted investment decisions and liquidity risk will increase as banks
Another important move that needs to be considered by Islamic financial institutions and will not be able to handle short- and long- term obligations due to mismatches in income or
regulators is the transition from the London Interbank Offered Rate (LIBOR) to Risk-Free insufficient funds raised. This will lead to insolvency issues.
Rates (RFRs). LIBOR represents the interest rates that large banks offer when lending to each Yet, in terms of total exposure to LIBOR, most of the respondents have low exposure to the
other on an unsecured basis. It is used as a reference rate for several financial contracts, benchmark rate and most do not have significant exposure to LIBOR-linked contracts as
bonds and loans globally. LIBOR represents average submissions by a panel of banks. Most most of them use fixed or domestic rates. Such an observation was mainly noted in foreign
LIBOR panels have been phased out (the USD settings stopped by June 2023) following currency floating rate instruments. In addition, in terms of LIBOR’s tough legacy contracts,
scandals involving manipulation among the rate-setting banks that were uncovered in 2012. most Islamic financial institutions have no or low exposure to it. This is because few Islamic
The huge reliance on USD LIBOR benchmarks by financial markets has been recognised financial institutions have investments or repurchase agreements (repos) based on LIBOR.
by the Islamic financial industry to pose a risk to financial stability. According to an Islamic There was also a low level of Sukuk issuance and investment that were dependent on LIBOR,
Financial Services Board (IFSB) survey in 2022 that studied the impact of the transition given that most USD Sukuk are fixed rate, some of which matured before USD LIBOR was
from LIBOR, 16% of 11 regulatory and supervisory authorities and 64 Islamic banking discontinued. The transition risk is mitigated by the inclusion of fallback provisions.
IFIs and Regulators Exposure to LIBOR Total Exposure Exposure to LIBOR’s Tough Legacy Contracts
60% 55%
50% 45%
43%
40% 35%
30%
20%
11% 9%
10% 4% 1% 0% 1%
0%
Source: IFSB Survey, IFSB Working Paper Series WP-26/12/2022, December 2022

Liquidity Management Challenges for Islamic

Financial Institutions
Shariah compliance complexities hinder development of Islamic Shortage of market players, Sukuk supply and HQLAs complicate
liquidity management tools Shariah-compliant liquidity management
Among the main challenges limiting the development of Islamic liquidity management is The restriction in dealing with conventional banks is an issue for liquidity management that
the different interpretations of Shariah aspects. For instance, many Islamic banks in key is especially apparent in countries where there are small numbers of Islamic banks. Hence,
Islamic finance markets utilise Murabaha and Wakala for Islamic interbank placements. Yet, in markets where Islamic finance is slow to develop, a Catch-22 scenario unfolds: not only
Tawarruq is only permitted on a need-only basis according to AAOIFI Shariah standard no. 30 does the lack of liquidity tools impact Islamic banks but the small number of financial
and it is prohibited in countries such as Oman, Morocco and Jordan. institutions also pose a challenge for effective liquidity management.
Another aspect of liquidity management impacted by Shariah rulings is the trading of Sukuk Another shortage impacting the development of liquidity management tools for Islamic
in the secondary market, as some scholars prefer 33% of Sukuk face value to be based on banks is in the supply of Sukuk. Additionally, the secondary market for Sukuk is illiquid
tangible assets while others require more. given that most Sukuk are held to maturity, although some Sukuk such as the IILM’s,
are traded. There are some Sukuk that have large tangibility ratio still barely trade at the
While Shariah aspects can be interpreted differently, one consensus is the impermissibility secondary market due to the low amount of issuances and number of market players.
of Islamic banks placing funds with their conventional counterparts. This is despite Islamic
banks placing Commodity Murabaha placements with conventional banks. This means that With this, it is important to have conventional investors participating to the Islamic interbank
Islamic banks are limited in their counterparty choice and so this lowers the depth of Islamic money market to enhance its liquidity. Further, high-quality long-term Sukuk such as sovereign
interbank markets compared to the conventional sector. issues have long-term maturities that do not serve the liquidity needs of Islamic banks.
Shariah compliance complexities also result in additional administrative processes, which Our analysis of the liquid assets of sample Islamic banks reveals that most of the HQLAs,
increase costs for these banks. which are used to meet Basel III liquidity coverage ratio (LCR) requirements, are cash and
reserves (even mandatory reserves) that are HQLA level 1 Islamic banks can draw on in
times of distress. There are inadequate tools that meet the HQLA criteria such as sovereign
Sukuk that can be converted into cash without the loss of value. Unlike conventional
banks, Shariah-compliant financial institutions in most markets cannot easily undertake
repurchase agreements, or repo transactions, that help facilitate liquidity management.
Islamic repo is discussed in Chapter 4 of this report.
26
Interview with
Standard Chartered Bank
KHURRAM HILAL From your perspective and given your market interactions,
CHIEF EXECUTIVE OFFICER AND what do you consider to be the current state of Islamic liquidity
HEAD, GROUP ISLAMIC PRODUCTS management solutions in the Islamic finance industry?
AT STANDARD CHARTERED
SAADIQ – THE GLOBAL ISLAMIC While the availability and diversity of Islamic liquidity management solutions remains a
BANKING BUSINESS OF STANDARD long-standing industry challenge, we have seen considerable positive progress in their
CHARTERED BANK (SCB) development over the past few years in key Islamic finance markets. We have seen the
introduction of local currency government treasury Sukuk programmes in many markets
(the most recent being the UAE Federal Government AED Sukuk programme) and the
rolling out of liquidity facilities by central banks (e.g. Bank of England’s Alternative Liquidity
Facility programme). The IILM has also played a pioneering role by introducing short-term
USD denominated Sukuk to help Islamic banks manage their global liquidity.
Khurram has more than two decades of core Islamic banking experience across consumer, In addition, there is now wider acceptance of Islamic repo products and some countries
wealth management, private banking, transaction banking and financial markets. He has led
such as Saudi Arabia have adopted a standardised model for the entire country (through
the development and roll out of the bank’s Islamic banking proposition across SCB footprint
the Double Wa’ad agreement). There is also increased adoption of the Wakala agreement
in Asia, Africa, Middle East, Europe and North America. He has been an active contributor to
the Islamic banking industry and regularly provides advice to regulators and industry bodies. for Islamic interbank placements between Islamic banks, developed by the International
Khurram have worked alongside some of the top scholars in the Islamic finance industry. Islamic Financial Market (IIFM). All these measures have certainly boosted the liquidity
management avenues for Islamic banks, especially in the key Islamic finance hubs of the
Khurram has an MBA from Institute of Business Administration (IBA), Pakistan and
successfully passed the CFA examination from the CFA Institute, Charlottesville, USA. GCC, Türkiye and Southeast Asia.
He is currently pursuing advanced studies in classical Islamic jurisprudence.
With the global Islamic finance and Islamic banking markets growing at double digits, there
is still ample room for Islamic liquidity management solutions to ramp-up and catch-up
with the growth in the overall Islamic finance market.

As a leading global Islamic bank, in your opinion, what are the From your perspective, what do Islamic banks need to do to
key challenges faced by Islamic banks related to Islamic liquidity address these challenges?
management, and how have these changed over the last decade? I think there are multiple stakeholders that all need to come together and work
Standard Chartered Bank has a long-standing presence in Islamic banking, serving all client cohesively to address these challenges:
segments across multiple geographies and product offerings. We are proud to be a banker
• Industry bodies: The industry bodies such as AAOIFI, IIFM, etc are doing important work
to Islamic banks, as we serve them for all their banking needs, from managing their cash,
to standardise Shariah structures as well as products and documentation. All these
helping their trade business and raising funding for them through syndications and Sukuk.
bodies need to work together with the Islamic banks and financial institutions across
From our experience working with Islamic banks, we see a few challenges when it comes
various geographies to ensure that the structures and products they come up with are
to liquidity management.
widely acceptable across different jurisdictions.
The first is either lack of solutions or reduced availability of those solutions compared to
• Shariah scholars: Scholars are the most important stakeholders as all products used by
those available to conventional banks in the same markets e.g. limited government Sukuk
individual Islamic banks need to be approved by them. The support and understanding
issuances, no short-term Sukuk, zero or lower return deposit facilities by central bank, lack
from scholars across markets for new products such as repos and hedging instruments
of counterparties for placing or borrowing funds in interbank markets. These put Islamic
would go a long way to boost this market.
banks at a disadvantage compared to conventional competitors.
• Local regulators: Local regulators/central banks/governments should provide support
The second challenge is diverse Shariah views across different scholars and different
in terms of issuing new instruments across the tenor curve, or deposit and repo facilities
markets. These hinder the development or adoption of globally standardised solutions that
at competitive pricing so Islamic banks are not at a disadvantage. They can also provide
can be transported across markets. While industry bodies such as IIFM and the Accounting
some flexibility to Islamic banks in terms of liquidity ratios etc. to compensate for the
and Auditing Organisation of Islamic Financial Institutions (AAOIFI) have contributed to
paucity of instruments.
standardisation efforts, we still have some way to go before we can be on par with the
conventional industry in this respect. • Forums and communication: Finally, industry dialogue on this topic needs to be
enhanced through industry forums, to increase knowledge flow and sharing among
In regions where Islamic finance is still in its initial phase of growth or is being introduced,
stakeholders and resolve any market-wide challenges. SCB has successfully conducted
they face a different set of challenges such as (i) lack of or weak Islamic finance laws, (ii)
its first Shariah Majlis in 2022 to bring renowned Islamic scholars together and discuss
limited Islamic banks in the country (so limited counterparties), (iii) no government Sukuk
the challenges that the Islamic finance industry faces and their potential solutions. We
or central bank deposit facilities.
also held regional Islamic finance industry forums this year for our clients, and we would
be happy to work with industry players to organise such forums in the future.
28
Key Liquidity
Instruments
29
30
Liquidity Programmes and Instruments

Issued by Central Banks
Examples of Liquidity Instruments and Programs Issued by Central Banks in Main Islamic Finance Markets
Country Product Tenor Liquidity
Overnight – 1 year
All Central Banks Central Bank Reserves Not tradable
(not all central banks offer returns)
Sukuk Al Salam 91 days Not tradable
Bahrain Sukuk Al Ijara 180 days Tradable
Wakala Intra-Day Credit Facility Overnight and 1 week Theoretically tradable, not traded in practice
Mudaraba Sukuk Up to 364 days Tradable

Bangladesh
Islamic Banks Liquidity Facility – Mudaraba 14 days Not tradable
Islamic Treasury Bills – Ijara 14 days Tradable

Brunei
Sukuk Ijara 3,12, 36, 60 months Tradable
Gambia Sukuk Al-Salam Bills 3 – 12 months Not tradable
Bank Indonesia Sukuk Instrument (SuKBI) – Musharaka 1 week – 12 months Tradable
Indonesia Bank Indonesia Shariah Certificate (SBIS) – Jualah 1 week – 12 months Tradable
Bank Indonesia Foreign Currency Sukuk (SUVBI) – Musharaka 1, 3 and 6 months Tradable
Kuwait Tawarruq with Central Bank 3 and 6 months Not tradable
Key Liquidity Instruments

Country Product Tenor Liquidity
Malaysia Islamic Treasury Bills based on Murabaha Up to 12 months Traded based on Bai’ Al Dayn Principle
Malaysia Bank Negara Monetary Notes-I based on Murabaha, Ijarah and Istithmar Up to 3 years Tradable
Wadi’ah Acceptance Overnight – 3 months Not tradable
Mauritania Islamic Treasury Bills Up to 180 days Tradable
CBN Non-Interest Note Up to 12 months Transferrable at par
Nigeria CBN Non-Interest Asset-Backed Securities Up to 12 months Tradable
CBN Non-Interest Special Bills Determined by Central Bank Not tradable
Oman Wakala Money Market Instrument Up to 3 months Theoretically tradable, not traded in practice
Standing Ceiling Facility – Mudarabah based Financing Facility Overnight Not tradable
Pakistan
Mudarabah Based Open Market Operations – Injections Determined by Central Bank Not tradable
Türkiye Short-Term Government Lease Certificates – Ijara Up to 12 months Tradable
Collateralised Murabaha Facility Overnight – 3 months Not tradable
Wakala Deposit by Central Bank in Islamic Banks Perpetual Not tradable

UAE
Islamic Certificate of Deposit 1 week – 1 year Not tradable
Dirham T-Sukuk – Ijara 2, 3 and 5 years Tradable
UK Alternative Liquidity Facility – Wakala Seven calendar days Theoretically tradable, not traded in practice
Source: LSEG Analysis, October 2023

32
Liquidity Programs and Instruments Issued by Central Banks (cont.)
Central bank instruments are essential for Islamic financial central banks serves is integral in the overall advancement of the Islamic financial industry,
and the biggest Islamic financial markets are leading the way.
institutions to manage liquidity
The right combination for central banks is to use market-based monetary operations to
The Islamic money market instruments available to Islamic banks and other Islamic issue tradable instruments that can benefit the central bank itself in terms of monetary
financial institutions to manage liquidity consists of transactions with other Islamic management while facilitating liquidity management for Islamic banks. They can be in the
financial institutions, special Shariah-compliant arrangements with conventional banks, and form of Sukuk or remunerative accounts or facilities.
government instruments. The development of liquidity instruments by authorities such as
IFSB defines such instruments as:
Can be issued on a regular basis Can set a benchmark for Can be held by all financial institutions,
Low risk
and sufficient volume other instruments Islamic or conventional
Source: Islamic Financial Services Board (IFSB)
Liquidity facilities used with the central banks are Islamic deposit accounts and standing Pakistan and the UK. The facilities can be Murabaha, Wakala or Mudaraba or in the form of
liquidity facilities. These are available in Bangladesh, the GCC, Indonesia, Malaysia, Nigeria, facilities that do not charge interest or profit.
CASE STUDY: Malaysia’s experience in Islamic liquidity management conventional banking sector given the third-party payments between banking consumers in
both sectors as well as involvement of conventional banks in Islamic banking through windows.
The Islamic finance industry in Malaysia is the most developed globally, according to the
The Central Bank uses Qardh acceptance and Commodity Murabaha to manage liquidity.
ICD- LSEG Islamic Finance Development Report 2023. Having a robust Islamic liquidity
The Commodity Murabaha program uses palm-oil as underlying commodity transactions.
management framework is among important aspects that Malaysia has taken into
In addition, the Bank uses Bank Negara Monetary Notes-i (BNMN-i) based on Murabaha,
consideration to build its Islamic financial system. Among the measures that contributed
Ijarah and Istithmar. This allows the expansion of Shariah concepts used in the monetary
towards its advancement in its Islamic liquidity management framework is the development
operations while diversifies the instruments.
of its deep Islamic money market, since 1994, with MYR 5.9 trillion (US$ 1.3 trillion) in trading
volume in 2021 according to BNM. It is also the largest Sukuk market globally with US$33.8 In August 2023, the BNM issued its Liquidity Risk Exposure Draft which is also applicable to
billion in Sukuk issues and US$299.3 billion in Sukuk outstanding in H1 2023. licensed Islamic banks and international Islamic banks. The draft sets out the requirements to
manage liquidity risk so financial institutions have appropriate measures to address their liquidity
Malaysia has a distinctive Islamic money market operations as its settlement of large amounts
needs. The Islamic Financial Services Act 2013 are among the legal provisions to support the
for the Islamic banking sector is conducted using separate Islamic accounts maintained at
requirements in this document. The draft is also refers to the Guiding Principles on Liquidity
BNM. This ensures the Shariah compliance of such operations. The liquidity is also linked with
Risk Management for Institutions Offering Islamic Financial Services by the IFSB. Among its
policy requirements is that Shariah limitations must be taken into consideration when a financial
Key Liquidity Instruments institution needs to transfer liquidity across entities within its group and business lines.
CASE STUDY: UK example highlights the need for ‘Alternative The Islamic liquidity facility is based on a Wakala model whereby Islamic banks in the
country can deposit cash with the central bank and receive returns based on an underlying
Liquidity Facility’ for Islamic banks in non-core markets portfolio of high-quality Sukuk such as those from the Islamic Development Bank. The
The Alternative Liquidity Facility (ALF) provided by the Bank of England (BoE) in the UK return from such an instrument is net from operating and hedging costs, and may be paid
was launched at the end of 2021 following six years of work, planning and development to depositors as expected profit rate. In order to manage currency risk, a cross-currency
involving a feasibility study, public consultation and fine-tuning its approach. The move swap is used with its maturity aligned with the Sukuk. The facility started with GBP 200
shows commitment by the UK government in developing its Islamic finance industry. million and with the expansion of Islamic banks in the country and the growing needs
of consumers who seek Shariah-compliant saving options with best deposit rates, an
The ALF represents the BoE’s efforts to place Islamic banks in the country on a level extension of the facility size looks imminent.
playing field with the conventional banks with regards to access to central bank deposit
facilities while enabling greater flexibility in meeting regulatory requirements under Basel III According to the Bank of England Alternative Liquidity Facility Limited Annual Report and
prudential rules (i.e. HQLA buffer). Accounts, the total deposits made by participant banks were GBP 140 million at end of
February 2023 as opposed to GBP 95 million at the end of 2022. The BoE also stands
Islamic banks in the UK used to hold high stocks of cash at nil return or illiquid, higher- as co-depositor for outstanding capacity in the facility. It amounted to GBP 60 million in
yielding Sukuk. Shariah-compliant liquidity tools in UK Sterling were limited and in February 2023, compared to GBP 105 million in 2022.
addition, some of the tools available are subject to GBP/USD currency exchange volatility,
such as dollar-denominated Sukuk. Prior to the ALF, Islamic banks’ efforts were mainly
concentrated on bank placements and deposits.
Monthly Average Aggregate Deposits in the Alternative Liquidity Facility

(GBP Millions)
250
200 200 193 196

184
164 164
150 144 151 142
125 124
108
100
50
Source: Bank of England Analysis

34
Liquidity Programs and Instruments Issued by Central Banks (cont.)
Despite shortage, short-term Sukuk provide Islamic financial Short-term Sukuk is employed by governments such as Bahrain, Bangladesh, Brunei, Gambia,
Indonesia, Malaysia and Türkiye. For instance, the Central Bank of Bahrain (CBB) issues Sukuk Al-
institutions with liquidity management options Salam that uses aluminium as the underlying commodity. The CBB also issues Sukuk Ijara, a sale
Among the instruments used by central banks is Sukuk that serve short-term liquidity and leaseback transaction, that has an underlying tangible asset. The IILM’s international Sukuk is
management purposes. Despite low, but expanding, short-term Sukuk supply (as compared to another source for liquidity management that will be discussed in the final section of this report.
longer tenor instruments), the experience of several countries indicate that Sukuk and instruments Bank Indonesia’s foreign currency Sukuk (SUVBI) is a notable recently introduced short-
that are based on securitisation of government finance contracts, such as investment certificates, Sukuk instrument. The Sukuk is expected to improve Indonesian Rupiah’s exchange rate
are some of the most suitable for Islamic interbank money markets. They can be designed into stability and will support the money market deepening in foreign currencies to support
regular issuance programmes that can build market liquidity. Authorities need to bear in mind that monetary policy and financial system stability. The Sukuk can be purchased by Islamic
public Islamic debt management requires the coordination not just of funding and expenditure banks and windows in the primary market and be transferable in the secondary market.
decisions but also of monetary operations and public debt operations. SUVBI can be owned by residents and non-residents in the secondary market.
Global Sukuk Issuance by Tenor Short Term Sukuk by Country of Issuance

(2019 – H1 2023, USD Billion) (H1 2023, USD Billion)
7.3 7.7
250 5.8
3.1 49.9 41.9
49.8
200
47.2
53.6
150 44.1
58.1
34.7 0.4
22.9 20.6
100 12.5 13.8 12.6
5.5 13.6 13.6 12.0
26.3
50 9.8
62.0 54.3 55.0 55.8 6.8
28.6
0
2019 2020 2021 2022 H1 2023
Source: LSEG Workspace *Other include Pakistan, Bangladesh, Indonesia and the Gambia

Absence of an Islamic lender of last resort facility poses a CASE STUDY: Liquidity shortage in Bangladesh Islamic banks
challenge for Islamic banks in times of stress resulted in central bank’s intervention
Another important liquidity risk management mechanism for central banks is the lender Some Islamic banks may also be impacted by a contagion effect causing a “bank run”
of last resort facility that Islamic banks can turn to for their liquidity needs especially in unravelling in a country. An example from Bangladesh involved the excess liquidity of
times of stress and crisis. Islamic banks facing liquidity challenges, while maintaining six Islamic banks (among eight private banks) turning negative. This was after panicked
solvency, have the option to utilise lender of last resort facilities offered by central banks depositors rushed to these banks to withdraw their deposits due to negative reports about
at their discretion. These include emergency and collateralised financing. For the latter, their practices. This impacted the banks’ cash reserves and statutory liquidity ratios.
HQLAs should be considered as suitable collateral. Yet, insolvent Islamic banks might The banks needed to secure a large amount of emergency liquidity support from Bank
often liquidate HQLAs to raise cheaper financing in the market. Assets that can be used Bangladesh, the central bank.
as collateral include sovereign, quasi-sovereign and multilateral institutions’ Sukuk.
In anticipation of an adverse response on the part of bank customers to the negative news
The concept of a lender of last resort is rooted in the pivotal role of the banking system about these Islamic banks that had been circulating in 2022, the central bank in December
in the economy. In the event of a substantial failure of a bank that has repercussions for that year introduced a special liquidity solution called “Islamic Bank Liquidity Facility” to
other banks, various sectors of the economy may also face adverse effects. For Islamic allow these banks to take up short-term loans. The tenor for the special arrangement is 14
banks, this applies to markets where Shariah-compliant banking is systemically important days. Apart from this, some of these banks opted to borrow from a conventional bank in
to the functioning of the banking system, for example in the GCC. For these reasons, the country via the interbank money market, but based on a higher commercial lending rate
the lender of last resort facility allows central banks to lend at a certain penalising rate given their situation. This raised a Shariah issue as highlighted by a Shariah board member
against a collateral. The rate used is an indication that the lending is transacted as a of one of the Islamic banks.
last resort. This applies to banks that are solvent and can repay the amount. However,
if the case was otherwise, other measures need to be taken. Given the lack of Shariah- Such a shock shows an extension of the central bank’s normal open market operations
compliant lender of last resort facilities in markets such as Egypt, Jordan, Morocco, activity. It also triggers the need for Islamic lender of last resort facilities by central banks
Nigeria and Oman, Islamic banks hold more liquid assets. to be prepared with Shariah oversight and communicated appropriately to the market.
The facility could be in the form of standing facilities, discretionary facilities for individual
The IFSB defines Qard with direct administration fees, collateralised Commodity support, and discretionary facilities for systemic use as highlighted by the IFSB in its
Murabaha, and Mudaraba or Wakala as Islamic lender of last resort facilities with tenors Lender of Last Resort Guidance Note.
of overnight, up to 1-week lending and longer-term liquidity that can be 30 days or longer
for each of these facilities, respectively. Islamic repo can be considered as well for longer
terms up to one year.
36
Islamic Interbank Placements
Examples of Interbank Financing Products Used in Main Islamic Finance Markets
Country Product Liquidity
GCC countries except Oman Commodity Murabaha Not tradable
Kuwait and Saudi Arabia Compensating Mutual Balances Not tradable
Interbank Mudaraba Theoretically tradable, not traded in practice

GCC countries
Interbank Wakala Theoretically tradable, not traded in practice
Interbank Mudaraba Tradable

Malaysia
Interbank Murabaha Tradable
Source: LSEG Analysis, October 2023

Shallow Islamic interbank market makes it the least preferred execution costs and different Shariah opinions mean that it is prohibited in markets such
as Oman. This is because some Shariah scholars argue that Commodity Murabaha is not
method for liquidity management in some markets based on real economic activity.
Islamic interbank liquidity instruments are based on Mudaraba, Wakala or Commodity There were also some volatilities in the commodity markets that affected Commodity
Murabaha. They can range from overnight to one year. They are short-term and liquid, Murabaha transactions. For instance, the military actions in Ukraine that were followed by
giving them a better chance of being traded in markets where there are sufficient Islamic the imposition of sanctions on Russia affected the supply of metals such as nickel in early
banks. Yet, according to the IFSB, Islamic interbank placements are less preferred for 2022. Meanwhile, Covid-induced border closures affected palm oil production in Malaysia
Islamic banks to manage liquidity when compared to central bank instruments as deposits that depends on the commodity for Tawarruq transactions.
need to be placed in HQLAs. In addition, the liquidity positions of Islamic banks tend to
synchronise during recessions or other periods of stress. For instance, Islamic banks in the A suitable alternative to Commodity Murabaha is interbank Wakala, considering how
GCC pushed down their liquidity positions when oil prices were low. the industry is advancing initiatives to use it. Wakala does not involve sourcing back
commodities to the transactions, so these are cheaper in theory. Yet the Wakala structure
For Commodity Murabaha, where it is used in countries that have a mix of Islamic banks cannot guarantee returns, so some Islamic banks opt out of it and use Commodity
and Islamic windows that operate within conventional banks, the institutions can receive Murabaha instead. As for interbank Mudaraba placement, it is based on the profit-sharing
and place funds from Islamic in addition to conventional banks, because the subject of the principle so it is not guaranteed as well. These types of instruments are not negotiable,
transaction’s Commodity Murabaha is a Shariah-compliant asset and not the balance sheet meaning that they may not be best suited for active secondary market trading, which
of the counterparty bank. In Malaysia for instance, interbank Tawarruq rose by a compound impacts the development of the Islamic money market in a country.
annual growth rate of 71% from MYR 6.7 billion in 2019 to MYR 33.1 billion in 2022, proving
its popularity. Yet, Commodity Murabaha is at a disadvantage as it needs to improve on its
38
Interview with
Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI)
OMAR MUSTAFA ANSARI From an AAOIFI standards compliance perspective and given your
SECRETARY GENERAL, ACCOUNTING market interactions, what do you consider to be the current state
AND AUDITING ORGANIZATION FOR of Islamic liquidity management solutions in the Islamic finance
ISLAMIC FINANCIAL INSTITUTIONS
industry?
(AAOIFI)
Islamic liquidity management solutions aim to provide Islamic financial institutions with
Shariah-compliant short and medium-term financial instruments, to assist them in managing
liquidity related challenges. The Islamic finance industry has made significant progress
in developing such solutions. Some jurisdictions and/or institutions have developed
comprehensive and sophisticated liquidity management tools, whereas others have developed
more basic solutions. However, efforts are ongoing to improve and expand the range of Islamic
liquidity management tools available to the Islamic finance industry. Typically, these solutions
Omar is responsible for managing the overall affairs of AAOIFI as the organisation’s involve Sukuk, Islamic interbank money markets and Islamic repo markets.
operational head. He is also leading the process of development of accounting, auditing,
governance and ethics standards for the global Islamic finance industry while coordinating However, as can be seen, Islamic finance is a deposit-heavy industry, primarily due to
and supporting its technical boards. a large retail depositor base, and secondarily, due to industry participants’ ingrained
His key areas of expertise include regulations and standards related to Islamic finance,
conventional banking mindset. It is true that solutions to address and develop this area
banking and takaful. In addition to assurance and advisory services to Islamic financial have been limited thus far, including challenges associated with cross-border market
institutions, including Islamic accounting advisory, Shariah audits, corporate finance access and regulatory obstacles.
advisory, and other areas.
Moreover, there are challenges regarding the Shariah compliance (level) of products used
Mr. Ansari is a fellow member of the Institute of Chartered Accountants of Pakistan (ICAP).
to manage liquidity. In many jurisdictions, for instance, conventional bonds are still used
In his previous role, he was Partner – Assurance & Head of Islamic Finance (Pakistan &
for Islamic liquidity management, while others depend heavily on controversial products.
Afghanistan) at Ernst & Young Ford Rhodes Sidat Hyder – a member firm of Ernst & Young.
He is a member of Securities & Exchange Commission of Pakistan’s (SECP) Shariah Advisory Certain products are controversial by design e.g. Tawarruq-based products, while others
Committee (SAC). may be acceptable from the design perspective but have weak Shariah compliance
controls on their implementation side. There is also overdependence on government

Islamic liquidity management solutions aim to provide Islamic financial

institutions with Shariah-compliant short and medium-term financial
instruments, to assist them in managing liquidity related challenges.
securities, which raises concerns about their availability to meet market demand. This standard affects certain transactions currently practised by the banking and Sukuk
Furthermore, not many jurisdictions have central banking windows to facilitate these markets in terms of tangibility ratios, the practice of debt rollover and instruments structured
transactions. On the other hand, the corporate Sukuk market is not robust enough to meet using Tawarruq (which unfortunately is widely practised by market players and in a manner
the liquidity management portfolio’s needs. that is inconsistent with AAOIFI Shariah standards). Earlier AAOIFI standards also had these
requirements, but this standard challenges certain contemporary practices and provides
Despite the growing interest in leveraging technology to develop digital Islamic liquidity greater clarity on them.
management solutions, such as blockchain-based platforms that can facilitate cross-
border transactions, significant progress has not yet been made. In a nutshell, there is a We observed that a large number of scholars and experts from the global Islamic
need for new and improved products in this area. finance industry responded positively to this standard, and it was well received and much
appreciated. However, it was also noted that certain experts and advisers challenged certain
What was the objective and impact of some of the recent AAOIFI requirements of the standard by considering them too prohibitive and against market needs,
standards, including SS59 on different Islamic instruments and further creating a false impression that the standard would impede the development and
growth of the Sukuk industry. This was largely due to focus on the short-term impact of the
the broader industry?
standard on certain Sukuk structures, without consideration to its long-term benefits to the
The primary objective of the AAOIFI standards is to safeguard and enhance the integrity of growth and development of the industry through greater acceptability levels.
the Islamic finance industry. This not only protects the interests of all industry stakeholders
but also promotes the industry’s sustainable growth and development over the long-term.
One of the ways of accomplishing this objective is by providing Islamic financial institutions
with a common operating framework in the form of standards, technical releases and
guidance notes. One such standard that was issued by AAOIFI was Shariah standard
59 “Sale of Debt”.
40
Interview with Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (cont.)
Given your experience and market engagement, what do you think • In addition, it is necessary to create a more favourable legal and regulatory environment
and to provide Islamic finance products and services a level playing field, according
should be done to promote greater adoption of some of the more to their true nature. Mostly the legal and regulatory frameworks have been developed
authentic alternatives in the industry? considering the needs and structures of conventional finance, and hence do not provide
a conducive environment. A part of this problem can be resolved through adoption of
Promoting greater adoption of more authentic alternatives in the Islamic finance industry
relevant AAOIFI and IFSB standards, along with necessary amendments in the laws and
involves collective and strategic efforts of all stakeholders. Some of the key initiatives that
regulations to provide room for Islamic finance; and
may be undertaken to accomplish this goal may include the following:
• Not least of all, market participants must make a concerted effort to discontinue the
• Having global acceptability of the structures and underlying products for Islamic finance
use of controversial products in the industry, which may have been initially approved
and hence mitigating the risk of non-acceptability of such instruments by a large
decades ago to provide market push. In other words, products that are not approved by
number of Shariah scholars, experts and certain markets that criticise and reject certain
global standards-setting bodies such as AAOIFI should be discontinued, and regulatory
controversial products such as those based on organised Tawarruq, etc. and eventually
and supervisory authorities, in particular, should take note of this and encourage gradual
opening doors for global harmonisation and eventually cross-border investments and
withdrawal of these products. This can be accomplished through standardisation and
financing transactions, with full confidence with regard to Shariah compliance;
harmonisation of best practices in Islamic finance by adopting AAOIFI standards, which
• Changing the mindset of the industry stakeholders and raising awareness about the were the result of consensus among industry leaders over the past 30 years and more.
principles of Islamic finance, and how they differ from conventional finance could be
Despite its limited resources, I am pleased to see that AAOIFI is contributing in each of the
beneficial. This would help avoid blanket imitation of conventional finance and aspiring
aforementioned areas. To foster the right mindset, AAOIFI promotes best practices in the
for a greater level of Shariah compliance in products, transactions and operations;
industry through its market engagements and advocacy and awareness programmes, such
as conferences and events, as well as through its capacity-building initiatives and activities.
On the regulatory and legal front, AAOIFI engages with regulatory and supervisory
authorities through various initiatives such as capacity-building and roundtable
conversations to facilitate the implementation of its standards in their respective
jurisdictions. In the Kingdom of Bahrain, for instance, the AAOIFI standards have not only
been adopted by the central bank but also codified into law.

Interview with
Sheikh Dr. Mohamed Elgari
SHEIKH DR. MOHAMED From a Shariah compliance perspective and given your market
ELGARI interactions, what do you consider to be the state of current
SHARIAH COMMITTEE CHAIRMAN, instruments being used in the industry for liquidity management?
THE IILM
Conventional tools and instruments that have been developed over time by the financial
sector came about to fill a need. This need could be to manage a risk or make profit or
secure stability and sustainability.
These are legitimate needs from the Shariah point of view and therefore deserve to be met.
The solutions provided by conventional banking need not be rejected wholesale. There
is no basis for this in Shariah. As long as we face the same problem and we, too, need a
solution, we should explore all possibilities, including from the conventional system.
Dr. Elgari is a member of the Shariah Council of AAOIFI as well as AAOIFI Board of Trustees. If it turns out that the conventional solution includes elements that are prohibited from
He also serves as the chairman for several Shariah boards including Dubai Islamic Bank, the Shariah point of view, all we need to do is restructure the same instrument to deliver
Emirates NBD, the IILM and other organisations. He is an advisor to numerous Shariah the same economic outcome but with Shariah acceptable contractual relationships. A
boards of Islamic banks and takaful companies worldwide in addition the Central Bank of case in point is the repurchase agreement (repo). Repo is one of the most important tools
Bahrain and Dow Jones Islamic Markets Index. to manage liquidity. Clearly, the conventional structure cannot be accepted because it is
Dr. Elgari holds PhD in Economics and Master in Economics from the University of California, interest-based lending. But this instrument itself is very effective in meeting a legitimate
the United States. He obtained his Bachelor in Economics from King Abdul-Aziz University. need. We were able to reformulate the structure from “loan” to “sale”, thus benefiting from
Dr Elgari is the recipient of the Islamic Development Bank Prize in Islamic Banking and the accumulated experience and knowledge in the field of repo liquidity management but
Finance and holds the KLIFF Islamic Finance Award for Most Outstanding Contribution to without violating the Shariah.
Islamic Finance.
So, we are always up to date in developing and utilising the best and latest practices.
Shariah is never a hindrance to progress.
42
Interview with Sheikh Dr. Mohamed Elgari (cont.)
What are some of the key Shariah concerns related to Commodity

Murabaha, which is the most commonly used liquidity
management instrument across markets? Also, given your
Conventional tools and experience and market engagement, what do you consider to be
some of the more authentic alternatives for the industry, and what
instruments that have been should be done to promote greater adoption of these instruments
by Islamic banks?
developed over time by the Contrary to what some people believe, the basic structure of the Tawarruq transaction,
which is commonly referred to as “Commodity Murabaha,” has a solid Shariah foundation.
financial sector came about Concerns are sometimes raised about the actual implementation of the procedures for
concluding a Commodity Murabaha. This was a problem when Tawarruq was initially
launched two decades ago. Now the Commodity Murabaha is supported by standardised
to fill a need. procedures, which significantly reduces possibilities of flawed Shariah transactions.
Having said that, I must also emphasise that innovation was and should remain the
cornerstone of success and growth of Islamic finance.
Commodity Murabaha has and is serving the purpose of Islamic finance. But we must not
be captives of Commodity Murabaha forever. We need to come up with new alternatives
and innovative solutions. Not that Commodity Murabaha is questionable from the Shariah
point of view, but because it leaves much to be desired with respect to efficiency.
Many Islamic bankers would say an alternative is next to impossible. But it is not so, at
least for one part of the use of Commodity Murabaha.
The bulk of Commodity Murabaha transactions in Islamic banking today goes to corporate
finance. I am a firm believer that the contract of Mudaraba can be a perfect substitute from
any respect. Mudaraba is a partnership in profit. Bankers believe it is not bankable. This
is correct in the context of current knowledge. However, I believe there is ample room to
develop a form of Mudaraba contract that is both Shariah compatible and bankable.

Islamic Repo
Instruments
43
44
Islamic Repo Still Waiting

For Take-Off To Cross Borders
Differences in opinion and varying Islamic finance practices limit Under-developed, shallow Islamic repo markets hold back growth
access to liquidity between jurisdictions of Islamic finance overall
Repurchase agreements, or repos, allow banks and other financial institutions to manage Apart from facilitating liquidity management for banks, repos also trigger a ripple across
their liquidity in the short-term—typically from overnight to three years—and use the inter-connected markets. As an instrument of the money market, which is the cornerstone
instrument as a source of alternative funding. In the United States alone an estimated US$2 for fixed income markets, a liquid Islamic repo market stimulates demand for securities,
– $4 trillion are transacted daily as market participants raise repos—which in the conventional such as Sukuk and shares of Shariah-compliant companies that could be Islamic financial
system are essentially collateralised short-term borrowing and lending—to optimise, institutions or companies that have Shariah-compliant certified activities, of varying
maximise and safeguard their liquidity. The instrument is seen as a ready solution for Islamic maturities that can be used for sale or collateral. This could encourage the issuance of
liquidity management provided its structure and operations are Shariah-compliant. more Sukuk that could then contribute to secondary market liquidity. This would be a
welcome growth as the Sukuk market is typically dominated by buy-and-hold investors.
However, Shariah-compliant repos have been slow to take off in most markets, even after
concerted efforts to harmonise structures and documentation by industry infrastructure The development of an Islamic repo market is also important to facilitate the role of market
bodies and the introduction of new instruments from the early 2010s. In tandem with the makers—who buy and sell Shariah-compliant securities—in improving secondary market
varying practices in Islamic banking and finance, each jurisdiction has been moving at liquidity. A well-functioning Islamic repo market also welcomes non-financial corporations
its own pace according to its own domestic needs, and progress has been imperceptible as participants. This means it supports liquidity in other markets, contributing to a more
for cross-border repos largely due to a lack of consensus among Islamic financial efficient allocation of capital in the real economy. However, the realisation of these growth
institutions, scholars and regulators on which structures would be easy to implement areas are contingent on the development of the overall financial system in the country to
within their borders, and are both Shariah-permissible and financially effective. This is a begin with.
more significant disadvantage for smaller and developing Islamic finance markets, such as
Jordan and Morocco, that do not have Islamic repo facilities, than the big jurisdictions such For example, the interbank repo market in Indonesia is purely cash-driven and provides
as Malaysia (where MYR39.4 billion in Islamic repos were transacted in 2021, representing no support to the securities market, the International Capital Market Association found
around 1% of the total Islamic money market volume, according to the central bank) and in March 2022. This lack of an active interbank repo market has contributed to the past
Saudi Arabia that have available instruments, and deeper and more liquid repo markets. underperformance of Indonesia’s securities markets relative to its neighbours. For context,
Islamic banks in Indonesia only started transacting interbank Shariah-compliant repos
Periods of tight liquidity and stress, for example when oil prices collapsed in April and May 2020 in 2016, most of Indonesia’s interbank transactions are currently in unsecured overnight
and economies were hit during the Covid-19 pandemic, show up the very real need for active markets, and a central counterparty clearing house is still in the works with Bank Indonesia
and deep cross-border Islamic repo markets that can help Islamic banks manage their liquidity expecting its establishment by early 2024.
and access an additional source of short-term funding on a secure and low-risk basis.
Islamic Repo Instruments

Murabaha-based Repo Flow Example
CASE STUDY: Saudi National Bank Islamic Repo Structure Gaining Secondly, if the security in the repo transaction is a Sukuk, coupon payments will be
involved. Under the SNB Islamic repo structure, the coupon payment is built into the sale
Wider Acceptance
price. Even if the other party would like to receive the payments when the coupon is paid,
Saudi Arabia’s largest bank by assets developed a Shariah-compliant repo structure based it can be structured so that the coupon payment is made as instalments in the future sale
on two separate Wa’ads—a promise to purchase and a separate promise to sell—to avoid price. SNB stresses that its structure allows for “similar” securities at the repurchase leg of
the use of Muwa’adah that it considers impermissible. The structure has gained wide the transaction. In this regard, it is not a ‘true repo’ as the party is not buying back the exact
acceptance among Saudi banks and the central bank. SNB believes its Islamic repo retains same thing that it first sold.
the merits of conventional repos with regards high liquidity and rehypothecation, hence
Thirdly, addressing the biggest risk: In the case of default and the first party does not buy back
making it competitive with conventional repos in price and risk.
the security at the agreed higher price, the harm inflicted on the counterparty goes beyond the
SNB’s first concern was that the collateralised Murabaha structure that underpins a lot of market price of the security that was subject to market movements and may have lost value.
Islamic interbank placements has a rehypothecation issue, as the pledged security based on SNB’s Islamic repo factors in compensation for the actual harm inflicted, which in addition
Rahn cannot be resold or sold forward. Without rehypothecation, the repo carries more risk and to the market price of the security is the missed opportunity to receive the price exactly as
becomes costlier. SNB’s Islamic repo instrument involves a true sale of a security, which solves mentioned in the undertaking, hence fairly compensating the other party in case of default. In
the rehypothecation issue. In the case of selling securities to the buyer, legally the ownership of the case of conventional repos, they are checked every day to see if their value has changed. If
the securities is transferred to the buyer. From a legal point of view, any taxes or Zakat on the the value has dropped, the buyer of the repo must top up to cover the difference, i.e. the margin
securities falls on the buyer because it is registered under their name. call that is based on an agreed-upon amount.
46
Islamic Repo Still Waiting For Take-Off To Cross Borders (cont.)
globally accepted Global Market Repurchase Agreement (GMRA) standards to allow for
Differences and Convergence: Key Shariah and
margining, netting practices and other key features in a repo transaction. These are meant
regulatory considerations to address counterparty and market risk faced by both parties in an Islamic repo, according
to Bank Negara Malaysia in its April 2023 Malaysian Islamic Financial Market Report.
The central Shariah and regulatory considerations for structuring Islamic repos surround
the ownership of the security in the two legs involving Party A selling the security to Party The other key Shariah consideration for Islamic repos has been the use of Wa’ad in a sale
B to raise liquidity or short-term funding, and then Party A repurchasing it from Party B at transaction. With regards an Islamic repo involving the sale and repurchase of the same
an agreed future date. Due to different Shariah opinions and varying practices, the Islamic asset, a bilateral Wa’ad between Party A and Party B in respect of the same one asset is
repo structures that have been introduced each has its own unique characteristics and considered to be equivalent to a contract, where both countervalues are deferred. This is
features. The better known and more widely used ones include Saudi National Bank’s prohibited under Shariah. Hence, the Case Study of the Saudi National Bank Islamic Repo
double Wa’ad structure (see Case Study) and Collateralised Murabaha (CM, based on in this chapter outlines the use of two separate Wa’ads.
Rahn). The biggest difference between the SNB structure versus the CM is that a true sale
must happen for the SNB structure but not for CM. For example, in the case of Malaysia’s Regulatory considerations would focus on disclosure and reporting, and capital adequacy
Collateralised Commodity Murabaha (CCM) there is no sale of the underlying asset, which requirements. Chiefly, there must be a legal framework with clear guidelines for the
remains with the original party. If there was only a transfer of legal title and ownership of structuring and documentation of Islamic repos, defining the rights and obligations of the
the security was never transferred, then Party B’s access or rights over the security are parties involved, addressing dispute resolution mechanisms, and mechanisms to protect
more limited than under the SNB method. investor interests. In this regard, there is also the need to establish or appoint a trusted
intermediary; in the conventional repo markets, risk is reduced for repo transactions that
For many years, the contention with one of the earliest Islamic repo instruments, the are conducted by a third party such as a clearing house or a bank that provides a layer of
Sale and Buy Back Agreement (SBBA) in Malaysia, was its use of Bai’ Al Inah that is not security for both the buyer and the seller of the security or asset.
accepted by most scholars in the Middle East where there is a large concentration of
Islamic financial institutions. Malaysia’s central bank released Guidance Notes for the SBBA
in 2013, and in the following year the Securities Commission tightened rules to stress that
the two legs of the transaction—sale and then buy back—must be executed and completed
separately, and that ownership of the asset must actually be transferred. The SBBA is still
being used in Malaysia, and local authorities are working on a standard SBBA agreement
and Practice Note to make it easier for the Malaysian market and offshore Islamic financial
institutions to use the instrument. The standard SBBA agreement is meant to meet the

CASE STUDY: Large ESG Repos add to much-needed market Legal considerations: The legal issues that were addressed included the enforceability
of the CCM under Malaysian law, the enforceability of close-out netting in counterparty
activity and depth insolvency, the regulatory capital treatment of the CCM, and the recharacterisation risk in
We have officially entered the era of Shariah-compliant banks using Islamic repo to raise connection with the title transfer mechanism of the collateral.
funds for ESG assets. The most recent recorded transaction, as of this writing, was in mid- Apart from CIMB Islamic’s ESG repo, in November 2021, Standard Chartered Bank
2022 when CIMB Islamic entered into a MYR1 billion Sustainable Collateralised Commodity executed its first ESG ‘Use of Proceeds’ repo with the Saudi National Bank. At the time, the
Murabaha (CCM) transaction with Standard Chartered Saadiq Malaysia. The CCM was US$250 million transaction was the first-of-its-kind in the Middle East, North Africa and
secured with high-quality Sukuk and proceeds were earmarked for eligible Shariah- Pakistan region. The funds were raised to benefit several large renewable energy projects
compliant assets within CIMB Group’s Sustainable Development Goals (SDG) Bond and and green initiatives in Saudi Arabia and the wider GCC region.
Sukuk Framework.
There are two primary benefits served by these ESG Repo transactions. Firstly, the SDGs
Shariah considerations: The key feature in the collateral arrangement is that the buyer in funding gap for countries of the Organisation of the Islamic Cooperation (OIC) was
the Commodity Murabaha transaction transfers the legal and beneficial title/ownership of estimated to be around US$1 trillion in 2019, which requires a lot more of a variety of funds
the securities to the seller. CIMB Islamic CEO Ahmad Shahriman Mohd Shariff explained and financing to narrow. Secondly, more types of Shariah-compliant repos will encourage
in August 2023 to LSEG that one of the Shariah concerns was that the collateral would no the development of a more active and deeper Islamic repo market. These ESG repos
longer be under the Rahn concept under paragraph 14.10 of the Rahn Policy Document also meet the growing demand for high-quality sustainable or ESG financing solutions as
issued by Bank Negara Malaysia (BNM) that implies that an arrangement of collateral governments and businesses commit to sustainability targets.
under Rahn should not involve any legal transfer of title. CIMB Islamic’s Board Shariah
Committee proposed to BNM’s Shariah Advisory Council (SAC) that although the legal title
of the underlying collateral is transferred, the arrangement is still within Rahn based on the
justifications as approved by the Committee. The SAC at its meeting on February 26, 2019
ruled that the proposed CCM product using scriptless financial assets as collateral that
incorporates Tawarruq and Rahn is allowed, subject to a few requirements, according to We have officially entered the era of
the CIMB Islamic CEO.
Shariah-compliant banks using Islamic
repo to raise funds for ESG assets. The
most recent recorded transaction, as of
this writing, was in mid-2022.
48
Islamic Repo Still Waiting For Take-Off To Cross Borders (cont.)
Surface level resemblances to conventional

repos and innovative approaches
There is always the call from communities of Islamic finance practitioners for more
innovation to develop “true” Shariah-compliant instruments without basing them on
conventional finance. However, market participants impatient for efficient products at par
with conventional instruments hark back to financial realities. Malaysia’s experience with
regards the Sell and Buy Back Agreement (SBBA) is particularly telling: Apart from the
contention with the use of Bai’ Al-Inah that we outlined in earlier pages, the SBBA does not
replicate the specificities of conventional repo, such as the ability of the seller to still enjoy
the coupon on the securities which have been sold, and hence the instrument falls short of
investor expectations. Malaysia then developed the Collateralised Commodity Murabaha
(CCM) that was more of a replication of the conventional repo in the various specificities
that the parties wanted and expected.

The IILM’s 5th Shariah Roundtable in 2021: Focusing on • IIFM team may have proposed a workable structure (Collateralisation/Collateralised
Murabaha) as an alternative for the conventional repo. Nevertheless, it may need to be
Shariah-Compliant Repo Market revisited as well, due to the lack of meeting with cross-border requirements.
During the IILM’s Fifth Shariah Roundtable in 2021, more than 20 prominent Shariah • Malaysian Sell and Buy Back Agreement (SBBA) based on Bai’ Al Inah and Wa’ad may
scholars, policymakers, Islamic finance practitioners and leading experts from Bahrain, be considered locally, however, there are constraints when implementing it in a cross-
Kuwait, Malaysia, Nigeria, Qatar, Saudi Arabia, Türkiye, United Arab Emirates and the United border manner. This is also applicable to Indonesia’s Triparty repo facility. Islamic
Kingdom gathered virtually to discuss and debate on various aspects of the Shariah- financial institutions face several constraints to raise funding through repo markets, and
compliant repo market. these constraints include differences in Shariah interpretation, lack of standardisation
The roundtable webinar, organised in collaboration with major international Islamic finance and regulatory hurdles.
bodies the Islamic Development Bank (IsDB), the Accounting and Auditing Organisation • After long deliberations and discussions, the most accepted structure, which has gained
for Islamic Financial Institutions (AAOIFI), the Islamic Financial Services Board (IFSB), wide acceptance among Shariah scholars from different jurisdictions, is the Shariah-
the International Islamic Financial Market (IIFM), and the International Shariah Research compliant repo structure based on two separate Wa’ads introduced by Saudi National Bank.
Academy for Islamic Finance (ISRA), raised a number of pertinent topics such as the
heightened need for Islamic repo facilities particularly given the Covid-19 pandemic, key • The scholars believe that the SNB repo structure can be further improved and
implementation challenges faced by global Islamic banks, Shariah rulings in relation to cross- implemented in a cross-border manner, as an alternative to previous repo structures that
border Islamic repo facilities as well as legal and structuring challenges faced by the industry. face Shariah issues.
Among the key findings from the roundtable were:
• Despite previous efforts on repo transactions in different jurisdictions and institutions,

Shariah issues surrounding repo still exist when executing cross-border liquidity
management using repos.
The scholars believe that the SNB
• AAOIFI may have introduced a Shariah standard on the product, however, the
implementation remains a challenge for institutions that issue short-term certificates. repo structure can be further
This implies that the standard needs to be revisited and standardised in a more flexible
manner that can help Islamic institutions. improved and implemented in
a cross-border manner, as an
alternative to previous repo
structures that face Shariah issues.
50
Interview with
CIMB Islamic
AHMAD SHAHRIMAN MOHD From your perspective and given your market interactions,
SHARIFF what do you consider to be the current state of Islamic liquidity
CEO, CIMB ISLAMIC BANK BERHAD management solutions in the Islamic finance industry?
ACTING CEO, CIMB FOUNDATION
Over the years, the total trading volume in the Malaysian money markets has exhibited
a steady increase, reaching MYR15.5 trillion at the end of 2021. This amount comprised
MYR9.6 trillion in the conventional money market and MYR5.9 trillion in the Islamic money
market. In 2022, the Islamic interbank money market experienced significant activity,
representing approximately 28% of the total turnover in the interbank money market. On a
global scale, money market instruments held the highest share in Islamic fund assets in
2021, constituting 39.4%. The second most significant asset class was equity, accounting
for 28.6%. This underscores the importance of money market instruments in the Islamic
financial markets (Bank Negara Malaysia (BNM), 2023).
Ahmad Shahriman Mohd Shariff was appointed the Chief Executive Officer of CIMB Islamic
Bank Berhad on 1 October 2019. In this role, he heads the Group Islamic Banking business To further support the Islamic liquidity market, BNM in April 2023 issued its first US Dollar
of CIMB Group including Islamic wholesale banking, Islamic consumer banking, Islamic
Bank Negara Interbank Bills Foreign – Islamic (BNIBFI) under the Shariah principle of
commercial banking and Islamic asset management and investment across key markets
such as Malaysia, Singapore and Indonesia.
Murabaha. The issuances of BNIBFI were issued for onshore foreign currency liquidity
management by licensed banks. The total issuances, all with tenors of 3 months,
He is also a board member of the CIMB Islamic Bank and Secretary of the Association of
stood at US$430 million.
Islamic Banking and Financial Institutions Malaysia (AIBIM). He is currently the Acting CEO
of CIMB Foundation as of 8 May 2023.
Ahmad Shahriman has over two decades of experience in the corporate and financial service
sectors, of which 17 years were in Islamic banking and finance-related leadership roles at
HSBC Amanah Malaysia Berhad as Director of Wholesale Banking and Citigroup where he
served as Head of Islamic Banking, Citibank Berhad amongst others.

We believe that the standardisation of agreements and Shariah concepts to

encapsulate specific repo features among market participants can
promote Islamic repo.
The International Islamic Liquidity Management Corporation (IILM) has demonstrated Balanced Sukuk supply and demand is also vital for managing Islamic liquidity. The
exceptional performance and leadership in this area. In 2022, their remarkable achievement remarkable growth of Malaysia’s Sukuk market in 2022 was impressive, with Sukuk
of supplying in excess of US$13.88 billion across 37 Sukuk series, accounting for 39% of the outstanding reaching RM1.2 trillion, representing a substantial 63% of the total Sukuk and
total global US dollar Sukuk issuances, is truly commendable. Their continued success in bonds outstanding in the Malaysian market (Securities Commission, 2022). Malaysia’s deep
2023, with US$4.35 billion in Sukuk issuances till May 2023 accounted for 26% of the total Sukuk market that accounted for 41.6% of the global outstanding Sukuk as at the end of the
global volume of US dollar Sukuk, further showcasing their significant contribution to the first half of 2022, is a testament to the country’s commitment to promoting and fostering
financial landscape. The IILM’s dedication to promoting liquidity and stability in the Islamic Islamic finance on an international scale (BNM, 2022).
financial market is noteworthy and sets them apart as a prominent institution in the field.
At the global level, the Sukuk supply and demand model by LSEG projected the supply-
On the other hand, the market-wide development of Islamic repo has been slow-moving. demand gap to narrow to US$81.4 billion in 2022 and then expand to US$101.4 billion in
For Collateralised Commodity Murabaha (CCM), we saw some market traction starting 2027. This would be mainly due to 52% of presently outstanding Sukuk maturing by the
in late 2021 and last year, in 2022, many new additional players entered this space. CIMB end of 2027. Therefore, addressing the supply-demand gap in the global Sukuk market is
Islamic alone initiated 10 Master Collateralised Murabaha Agreement (MCMA) negotiations of utmost importance to ensure the continued growth and stability of Islamic finance via
with new bank counterparties. This year we are seeing many non-bank financial institutions Islamic liquidity management.
(NBFI) expressing interest in the CCM space, and CIMB Islamic has started negotiating
MCMAs with some of them. BNM has also impressed upon NBFIs, particularly the
insurance companies in Malaysia, to develop repos (both conventional and Islamic) as an
additional funding avenue that can be used as part of the Contingency Funding Plan setup
for financial institutions. As for Sale and Buy Back Agreement (SBBA), most of the traction
comes from BNM trades with one or two banks dealing with NBFI counterparties. There
was a minimal amount of interbank activity in the SBBA space.
52
Interview with CIMB Islamic (cont.)
In your opinion, how important is it for the industry to develop As a leading Islamic banking institution, please describe some
and promote Islamic repo instruments, and what are some of the of your recent activities in the Islamic Repo market, and suggest
challenges related to this? what more can be done to increase the uptake by Islamic banks?
The development and reinforcement of Islamic repo as a product suite is integral to the CIMB Islamic’s recent and notable activities in the Islamic repo space include the landmark
Islamic finance industry where it acts as an effective funding tool as well as a high-quality MYR floating rate ESG Collateralised Commodity Murabaha (CCM) with another Islamic
liquid assets (HQLA) management tool for Islamic financial institutions. It also provides financial institution, positioning CIMB Islamic as a market leader in sustainable finance as
liquidity for Sukuk traders and promotes efficiency and vibrancy of the Sukuk market. well as Islamic treasury and capital markets. Other than that, we have also transacted a
cross-currency CCM using Risk-Free Rates (RFR) as a benchmark. This is the first cross-
We believe that the standardisation of agreements and Shariah concepts to encapsulate currency CCM transacted in the market and showcases an innovative solution by CIMB
specific repo features among market participants can promote Islamic repo. A Islamic in meeting clients’ requirements.
standardised agreement such as the Global Master Repurchase Agreement (GMRA) can
spur adaptation of Islamic repo globally. Some differences of interpretation between One of the first steps that the market is able to take is the standardisation in the Islamic
Shariah scholars, particularly between those in the Middle East and Asia may occasionally Repo Agreement, similar to GMRA in the conventional market that is acceptable globally
pose a challenge to the development of Islamic repo. or at least within a geography, much like the Master Commodity Murabaha Agreement
(MCMA) in Malaysia. This can spur the adaptation of Islamic repo similar to what the
Regulations also need to be in sync with the rapid pace of development in the Islamic repo Tahawwut Master Agreement has done for the Islamic derivatives market.
market. This allows Islamic financial institutions to apply the correct treatments to the
Islamic repo in their balance sheet. In addition, simplification of selected trade documentation under Islamic repo is required,
for example reducing the number of schedules to complete a trade. Currently, there are
Other than regulation, Islamic financial institutions’ system and operation readiness needs four schedules under CCM that must be completed.
to be addressed. For SBBA in Malaysia, certain risk-centric features such as margining and
netting practices are uncommon. Another suggestion for further development of Islamic repo would be for the central bank’s
window for Islamic repo to implement a tendering system for the interbank players, similar
to conventional repo. This is crucial in providing liquidity in the Islamic repo market and
would encourage more Islamic banks to participate.
Lastly, more issuances of Sukuk by global central banks, federal/state governments and
agencies are also welcomed, as this will help further develop Islamic repo through the
availability of acceptable assets to facilitate such Shariah-compliant transactions.

Liquidity Risk
Management
by Islamic
Financial
Institutions
53
54
Liquidity Risk Management by Islamic

Financial Institutions
Industry still in need of active, deep markets in interbank and one of the Review’s 18 recommendations was to enhance the liquidity infrastructure for all
Islamic finance segments—Islamic Capital Market, Islamic banking, Takaful, and non-bank
liquidity instruments financial institutions—to ensure their growth. Among the recommended actions are: creation
In the IFSB’s Islamic Financial Services Industry Development Ten-year Review released in of a liquidity infrastructure and ecosystems for Islamic money and capital markets; increase
May 2023, a survey revealed that more than 50% of Islamic banking respondents cited a Sukuk issuances that can be used for liquidity management and traded across borders; and
lack of active and deep markets in interbank and liquidity instruments. Across the industry, develop instruments for risk mitigation and short-term liquidity management.
Tools Used by IFIs to Mitigate Liquidity Risk
Instrument Tenor Currency Tradability Rating
Central bank Islamic instruments 3 months – 3 years Local Limited Unrated
Short-term Sukuk 3 months – 1 year Local Limited Unrated
Commodity Murabaha 1 week – 6 months Any No Counterparty
Interbank Mudaraba Overnight – 1 month Any No Counterparty
Interbank Wakala 1 – 3 months Any No Counterparty
Islamic repo Overnight – 1 month Local No Unrated
IILM Sukuk 1 day to 364 days Can be issued in any reserve currency Yes A1 and F1
Sources: “An Alternative Approach to Liquidity Risk Management of Islamic Banks”, Muhammed Habib Dolgun, Abbas Mirakhor (De Gruyter, 2021); IILM
Liquidity Risk Management by Islamic Financial Institutions

CASE STUDY: Philippines building Islamic liquidity infrastructure

for nascent industry
In May 2021, Bangko Sentral Ng Pilipinas issued guidelines on the management of liquidity
risk by Islamic banks and Islamic bank units operating in the country. An observation
period of three and a half years, until December 31 2024, was adopted to give Islamic
financial institutions time to adapt as necessary. Because of the lack of Islamic liquidity
management instruments, Islamic banks and Islamic bank units are only required to
comply with Basel III 100% LCR and NSFR rules from January 1, 2025.
The guidelines emphasise Shariah compliance in liquidity risk management, including the
choice of instruments or tools to mitigate liquidity risk. They also offer guidance on the
treatment of Islamic banking accounts such as profit and loss sharing investment accounts.
It was as recent as 2019 that the Philippines signed a new Islamic banking law. Since
then, apart from the new liquidity risk management guidelines, it has taken other steps to
develop the industry, including signing a cooperation agreement with AAOIFI in 2021 and
approving the prudential reporting framework for Islamic banks and Islamic banking units
in 2022. There is currently one Islamic bank in the Philippines, the state-owned Al Amanah
Islamic Investment Bank of the Philippines, which is a subsidiary of the Development Bank
of the Philippines. The country is also planning to issue its maiden Sukuk as it currently
seeks alternative funding sources for its budget.
56
Basel III Requirements for Liquidity

Management for Islamic Financial Institutions
IFIs well-covered with short-term and long-term liquidity buffers in domestic currencies or as securities in foreign currencies. Level 2A and Level 2B (both
levels can only make up 40% of the total stock of HQLAs) are lower-rated and riskier assets
Under Basel III rules, all financial institutions—conventional and Islamic—must meet two than those that qualify as Level 1. The IFSB’s Basel III liquidity risk management guidance
liquidity ratios: the Liquidity Coverage Ratio (LCR) must be at least 100%, which means drove the increase in supply of Sukuk to be used as HQLAs, with issuances gradually
holding an amount of HQLAs that are equal or greater than net cash flow over a 30-day increasing from 2019 as different countries started implementing the new LCR rule (see
stress period; and the Net Stable Funding Ratio (NSFR) must be at least 100% on an chart on issuance of Capital Tier Sukuk in Chapter 4).
ongoing basis to reduce funding risk over a longer time horizon. Complementing each
With the introduction of Basel IV reforms proposed by the Basel Committee on Banking
other, the LCR focuses on the quality and liquidity of assets while the NSFR focuses on
Supervision, which focuses on the denominator of the capital ratio – banks’ risk positions,
the quality and stability of liabilities. HQLAs are essentially assets that can be easily and
financial institutions might face higher capital requirements as the new rules aims to
immediately converted into cash with no or little loss of value during a time of stress.
standardise and limit the use of internal risk models. There was a realisation that same risk
The Bank of International Settlements’ Basel III: The Liquidity Coverage Ratio and liquidity risk positions were valued differently by different institutions’ internal models. This will cover
monitoring tools document of 2013 grants the financial authorities of each jurisdiction the credit, market, counterparty and operation risks.
discretion to define what Shariah-compliant financial products can be acceptable as HQLAs.
Bangladesh bank run a reminder for continued prudence,
In 2015, the Islamic Financial Services Board’s (IFSB) Guidance Notes (GN-6) set out the
development of liquidity management framework
HQLAs that have in general been referenced by jurisdictions. Broadly, Level 1 HQLAs (the
highest level) comprise the most liquid assets such as coins and banknotes as well as the Looking at banks, which hold the lion’s share of global Islamic financial assets, with the
highest-rated and safest Sukuk or other Shariah-compliant marketable securities, which exception of the average LCR of Islamic banks in Bangladesh, conventional banks and
come from sovereigns and organisations that are assigned a 0% risk weight, such as Shariah-compliant banks across seven countries of the GCC and South Asia comfortably
multilaterals like the IILM. If the Sukuk and other Shariah-compliant marketable securities met LCR in 2022. Malaysia’s conventional and Islamic banks also met Basel III LCR
are issued by sovereigns or organisations that have a non-0% risk weight, they should be requirement, averaging 154% last year, according to central bank data.

Average Liquidity Coverage Ratio in Top Islamic Finance Markets

(2022)
350%
300% 289%
250% 219% 212% 203% 153%

186% 198% 188% 191% 150%
200% 169% 177%
145%
150%
100% 82%
50%
0%
Source: LSEG Analysis. The sample uses top five conventional and Islamic banks in each country. The data is collected based on available Pillar III disclosures.
The top Islamic finance markets used represent 95% of total global assets
Islamic banks in Bangladesh ended 2022 with 61.72% lower excess liquidity compared to resulted in the central bank introducing a special liquidity facility in December to provide
2021, according to Bank Bangladesh. The central bank’s statutory liquidity reserve ratio support for the Islamic banks (See Case Study in Chapter 2). While the situation was
for Islamic banks in Bangladesh is lower (5.5%) than for conventional banks (13%), part of contained relatively quickly and the liquidity stress eased in the months that followed, it
the regulator’s efforts to support the growth of Shariah-compliant financial services in the is a reminder for the Islamic financial services industry that weak liquidity buffers could
country. This lower level of liquidity was severely challenged when six Shariah-compliant materially increase vulnerabilities to deposit runs and that pro-growth policies must be
banks, according to local media reports, faced intense pressure on their liquidity amid a supported by a sound prudential regime.
bank run situation after allegations of loan irregularities involving one Islamic bank. This
58
Basel III Requirements for Liquidity Management for Islamic Financial Institutions (cont.)
As we pointed out in Chapter 1, the unique situations of each country determine how much framework to better support Shariah-compliant banks. For economic growth and
liquidity their banks hold. Among the bigger Muslim-majority countries where Islamic development, Pakistan’s banks are channelling a significantly low volume of credit to the
finance would have more of an appeal, the situation could not be more telling than in the private sector, even compared to Türkiye whose banks hold comparable levels of LCR.
case of Türkiye and Pakistan where Shariah-compliant banks hold more than double the
required LCR, according to IFSB PSIFIs data. The growth of Islamic banks’ financing to the private sector in Pakistan dropped in 2022
as the country, already struggling from sky-high inflation and dwindling foreign reserves
To add to our commentary on Türkiye in Chapter 1, for a considerable period, Pakistan’s (and shortage of forex in the interbank market, according to local reports), fell deeper into
banks have not fully fulfilled their role as facilitators of economic growth and intermediaries economic crisis following major floods in August 2022 that heaped more pressure on its
of capital to the private sector, according to assessments made by organisations such as finances. Pakistan received a lifeline when in July 2023 a US$1.2 billion first tranche from
The World Bank. For the banks, holding excessive levels of liquidity impacts profitability an agreed US$3 billion IMF bailout came through. The trajectory of Islamic finance in
because of the cost in the form of lost earnings from undeployed funds. Part of the Pakistan is now under heightened scrutiny, particularly since the government announced in
solutions for this are being addressed by the central bank’s 2021 to 2025 Strategic Plan for November 2022 its intention to transition the country’s banking system from conventional
the Islamic Banking industry that includes the development of the liquidity management to Islamic by the end of 2027.
Domestic Credit to Private Sector of Pakistan Growth of Financing to Private Sector –

and Key Islamic Banking Markets Pakistan and Türkiye Islamic Banks
(2022, Percentage of GDP) (2018 – 2022)
70%
63.2%
60% 58.6%
52.2%
50%
40%
28.8% 28.10%
30%
22.4% 20.30%
20%
13.6%
8.9%
10% 1.4%
0%
0 20 40 60 80 100 120 140 160 2018 2019 2020 2021 2022
Source: World Bank Data

2019 2020 2021 2022 Source: IFSB country-level PSIFIs Data

Stable for the long-term The average NSFR of conventional and Islamic banks across seven countries of the GCC
and South Asia in 2022 met Basel III requirement of a minimum of 100%. In Malaysia, Bank
Average Net Stable Funding Ratio in Top Islamic Finance Markets

The aim of NSFR requirements is to restrict maturity mismatches between assets and
liabilities and limit the reliance on unstable short-term funding to finance potentially illiquid
Negara Malaysia data shows an average NSFR of 118.2% for the entire banking system.
Saudi banks are also amply buffered but a closer look at their other ratios reveal how
long-term assets. The higher the value of NSFR, the higher the level of a bank’s liquidity, stretched they really are (see commentary in following pages about Saudi Arabia Islamic
which indicates less difficulty to meet its current liquidity obligations. banks breaching 100% financing to deposit ratio).
Average Net Stable Funding Ratio in Top Islamic Finance Markets

(2022)
200%
170% 173%
160% 152%
136%
125% 120%
120% 110% 114% 110% 112% 113% 112% 113% 106%
80%
40%
0%
Source: LSEG Analysis. The sample uses top five conventional and Islamic banks in each country. The data is collected based on available Pillar III disclosures. The top Islamic finance markets used represent 95% of total global assets.
60
Basel III Requirements for Liquidity Management for Islamic Financial Institutions (cont.)
CASE STUDY: Oman secures Islamic liquidity management with the CBO for a period ranging from one day to three months. The CBO will manage
and invest the funds in Shariah-compliant instruments.
instrument, addressing its immediate needs
There are currently no Islamic repos, short-term government Sukuk, or Islamic alternatives
The Central Bank of Oman (CBO) in December 2022 introduced a new Islamic liquidity to treasury bills in Oman for Islamic banks to manage their liquidity or use as alternative
management instrument, which was much-needed considering the lack of these tools in sources to raise funding. Oman has the youngest and smallest Islamic banking market
the Sultanate. The Wakala Money Market instrument is the first of several Islamic liquidity in the GCC. The CBO started an Islamic liquidity management project in 2018, around six
management instruments that the CBO will introduce to provide liquidity support for the years after Islamic banking was officially allowed to operate in the country.
Islamic banks in the country. Using the instrument, Islamic banks place funds in US Dollars
Tier 1, Tier 2 Sukuk volume down on higher cost of funding predictable returns in the Islamic capital market. 2022 proved challenging. In a year
Average Net Stable Funding Ratio in Top Islamic
dominated by higher cost Finance Markets
of funding after central banks raised rates to contain inflation,
While the issuances of Tier 1 and Tier 2 Sukuk have grown since 2010 when the Basel the volume of capital tier Sukuk issuances dipped by 17.2%. Saudi financials were the
Committee on Banking Supervision agreed on Basel III minimum capital requirements, biggest contributors to the Capital Tier Sukuk market.
there has been a shortage of these tradable instruments with low capital risk and
Capital Tier Sukuk Issuance

(2013 – 2023, USD Million)
9,000 8,474 8,261
8,000
7,000
6,000
4,736 6,839
5,000 4,381
4,000
2,957
3,000 2,563 2,494
1,921
2,000 1,395
1,000 400
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: LSEG Eikon

Saudi IFIs flood Capital Tier Sukuk market as they breach 100% Islamic banks’ financing to deposit ratio has been on the rise since 2018, breaching the
100% mark in 2022. The Islamic financial institutions that needed to buffer their capital
financing to deposit ratio with Sukuk were the biggest in the Kingdom: Al Rajhi (US$4.4 billion issued), Saudi National
Saudi Arabia’s financial institutions issued a staggering 88% of all Tier 1 and Tier 2 Sukuk Bank (US$877.4 million) and Riyad Bank (US$750 million). Al Rajhi reported a 30% rise in
in 2022. Their total issuance of US$6.03 billion was a substantial 55% surge compared real estate financing for Saudis and a huge 61% jump in financing for SMEs. SNB reported
to 2021 as the government channelled more and more of its oil receipts to the sovereign a 21% increase in mortgage financing. At the rate of growth of the financing to deposit
wealth fund PIF, depriving Islamic banks of ample liquidity while they continue to provide ratio, it is clear that Saudi Vision 2030 projects need more than just bank support.
financing for Vision 2030 projects.
Saudi Arabia Islamic Banks Financing to Deposit Ratio

Top Countries in Capital Tier Sukuk Issuance Saudi Arabia Islamic Banks Financing to Deposit Ratio
(2017 -
(2021 – 2022, USD Million)
2022, Percentage) (2017 – 2022, Percentage)
7,000 120
6,028 105.54
6,000 100 97.53
91.69 93.10
88.45 87.74
5,000
80
3,883
4,000
3,456
60
3,000
40
2,000
922 20
1,000 586
225
0 0
2017 2018 2019 2020 2021 2022
2022 2021
Source: LSEG Eikon Source: LSEG Analysis of SAMA Data
62
Interview with
S&P Global
DR. MOHAMED DAMAK From your perspective and given your market interactions,
MANAGING DIRECTOR / SECTOR what do you consider to be the current state of Islamic liquidity
LEAD FINANCIAL INSTITUTIONS & management solutions in the Islamic finance industry?
GLOBAL HEAD OF ISLAMIC FINANCE
S&P GLOBAL RATINGS Liquidity management instrument offerings remain limited in Islamic finance although
Basel III liquidity coverage ratio has created opportunities for their growth. We estimate the
amount of outstanding Sukuk at around $872 billion at year-end 2023. A large portion of
these Sukuk are not eligible for inclusion as High-Quality Liquid Asset either because they
were issued by financial institutions or because they were issued by a less creditworthy
counterparty or simply because they are not actively traded. The latter is one of the
reasons why Sukuk show better returns in periods of market turbulence.
The lack of issuance makes them a buy-and-hold instrument. This is why Islamic banks
Mohamed Damak is a Senior Director and the Sector Lead for Financial Institutions in generally rely extensively on cash and central bank placements as their main liquidity
the Emerging EMEA region. Mohamed is also the Global Head of Islamic Finance at
management tools, somewhat putting them at a disadvantage with their conventional
S&P Global Rating (SPGR). Mohamed leads SPGR’s cross-practice analytical thought
counterparts from a profitability perspective. The other challenge that Islamic banks face
leadership initiatives and credit rating activities in the Islamic Finance sector globally. In
addition to these responsibilities, Mohamed co-heads the Emerging Market Global Industry for their liquidity management is the fragmentation of the Islamic finance industry. Islamic
Focused Team and is a member of several senior forums and research labs including the finance lacks integration by geography and by sector. By geography, Islamic finance is a
Digitalisation of the Markets Research Lab. collection of small industries that are not interconnected. For example, an Islamic bank in
Prior to joining SPGR, Mohamed worked as a Principal Credit Risk Officer for the African North Africa will generally not use local currency or even foreign currency denominated
Development Bank in Tunis. From 2006 to 2010, Mohamed worked for SPGR covering government issuances from the Gulf as liquidity management tools. It will rather rely on
conventional and Islamic financial institutions in the Middle East and North Africa region. local issuances if they exist or on specific instruments from its central bank. Issuances
Mohamed holds a PhD in Finance, a Master in Money, Banking and Finance from University
by multilateral lending institutions remain scarce as well, particularly for non-dollar
of Paris 2, Pantheon Assas, and a Master in Financial Institutions Management from Ecole denominated issuances where the offering is almost non-existent.
Supérieure de Commerce de Tunis.

Given your experience and market engagement, what do From your perspective, what should the industry be doing to
you consider to be the key issues related to liquidity risk address these issues over the next few years?
management facing Islamic banks, and how effective are While we cannot recommend any policy action, as per our role in the market, we have observed
current instruments at addressing these? that the industry is working toward resolving some of these challenges including:
The key issue is the lack of instruments. Islamic banks rely primarily on placement with • Some sovereigns have established large Sukuk issuance programmes and are issuing
central banks and to a lesser extent eligible Sukuk issuance to manage their liquidity. regularly to provide Islamic banks with the necessary instruments to manage their liquidity.
We expect Sukuk issuance to slow down in 2023 to around $150 billion from $155.8 This is the case in Saudi Arabia, for example. In our view, a higher volume of issuance is
billion due to less supportive market conditions as a result of higher interest rates. In necessary to boost the availability of liquidity management instruments for Islamic banks.
2022, around 22% of Sukuk issuance were denominated in foreign currency, equivalent Listing these Sukuk on organised markets could also help improve their liquidity.
to around $34 billion. This is clearly insufficient for an industry where the total assets of
the Islamic banks increased by around $150 billion during the same period and where • In some countries, the central bank has created certain liquidity management instruments
banks are competing with other investors to grab a slice of Sukuk issuances. to help banks comply with regulation, at a cost for their profitability. Whether it is in Sukuk
or placement form, banks are using central bank instruments to manage their liquidity.
The lack of standardisation in the Sukuk market and lack of harmonisation between Sometimes, this would come with some risks if the currency of denomination of the
the different Islamic jurisdictions are also negative factors for the availability and the instrument is not the same as the central bank currency.
effectiveness of Sukuk as liquidity management instruments. The Accounting and
Auditing Organisation for Financial Institutions (AAOIFI) Standard 59, for example, • Standardisation of Sukuk remains difficult for now given the different interpretation of
requires the delisting of Sukuk from the market if the tangibility ratio falls below 33%, Shariah but it could be helped by digitalisation. Issuing, listing and managing Sukuk on
which could impact the liquidity of the instrument. This standard is not applicable in platforms could help the industry going forward provided that some prerequisites are
all the jurisdictions where Islamic banks are present. Using central bank instruments achieved including the presence of a regulatory framework. Digitalisation could spur a
to manage liquidity can help due to the immediate availability of these resources significant increase in the volume of Sukuk issuance improving their accessibility for banks.
when needed but it comes at a cost as these instruments have a low yield by design.
• Some countries have clarified that their central banks could use structures such as Qard
The availability of these instruments could also be in doubt for the foreign currency
Hassan or others in order to act as a lender of last resort and provide support to failing
denominated instruments and where the central bank would have a very limited
financial institutions to avoid contagion. Having proper regulatory backstops could help
amount of usable reserves. The other challenge that the industry faces is the absence
financial institutions manage liquidity particularly in an environment where moving money
of a lender of last resort in many jurisdictions and the debate whether profit-sharing
out of banks is eased by digitalisation and social media can aggravate shocks.
investment account holders should or not absorb a portion of losses in case of
problems. This is why Islamic banks will generally have a significant amount of liquid • Some countries have clarified the different types of investment accounts and what accounts
assets on their balance sheet, which could sometimes be viewed as inefficient use of are supposed to absorb losses in case of issues. We understand that the contribution of
their resources. these accounts is still limited in places like Malaysia, for example.
64
Interview with
Kuwait Finance House
GEHAD MOHAMED From your perspective and given your market interactions,
EL-BENDARY what do you consider to be the current state of Islamic liquidity
GROUP CHIEF RISK OFFICER, management solutions in the Islamic finance industry?
KUWAIT FINANCE HOUSE
Islamic liquidity management has always suffered from a lack of products to deploy
excess liquidity compared to the conventional side, specifically on the short spectrum.
The IILM plays a huge role in providing solutions and diversity to deploy excess liquidity.
However, we still need more solutions and initiatives to provide alternatives to the current
market products, for example to address the lack of solutions in major currencies and local
currencies other than the US dollar.
Given your experience and market engagement, what are the key
Mr. El-Bendary is currently the Group Chief Risk Officer at KFH since 2018 and is a Board challenges faced by Islamic banks related to liquidity risk, and
Member at Kuwait Turk Participation Bank (KTPB). He has over 23 years of experience in risk how effective are current instruments at addressing these?
management, auditing, and internal control systems in financial institutions. He previously
held several executive positions at KFH including the position of General Manager, Risk Islamic banks tend to be liquid in general and the challenge is always deploying excess
Management from 2016 until 2018. liquidity and not sourcing liquidity. One of the main challenges Islamic banks face is
Mr. El-Bendary oversaw the implementation of several initiatives including the development transacting with conventional banks due to limitations to deal in Islamic products, which
of a robust Enterprise Wide Risk Management Program for KFH Group, in addition to makes Islamic banks miss a huge market. With a lack of products, counterparties’ lines are
overseeing the implementation of the regulators’ instructions including Basel I, II and III, mostly utilised and Islamic banks are always sourcing new channels to deploy their liquidity.
IFRS9 and liquidity frameworks and guidelines.
He has successfully completed specialised training programs in Enterprise Leadership from
INSEAD University, Network Leadership Program from IMD University, and Advanced Risk
Management from Wharton School. He holds numerous specialised professional certificates
including the International Certificate in Banking Risk and Regulation (ICBRR) from the Global
Association of Risk Professionals (GARP) in 2009.

As a leading Islamic banking institution, what is your bank’s

approach to asset-liability management (ALM) issues, and what do
you think institutions can do to better mitigate such challenges?
Islamic banks tend to be liquid in
In our bank, to have a better assets and liabilities management framework, we have
invested in setting up an ALM management information system with the aim of having
complete, accurate, comprehensive, reconciled and integrated data. We also adopted a
general and the challenge is always
well-designated ALM engine to support projecting the bank’s cashflows and repricing gaps
on business as usual bases and stress testing bases to help recognise the bank’s future
deploying access liquidity and not
funding needs and possible sensitivities to benchmark rate changes. sourcing liquidity.
In addition, governance was set in accordance with the best practices in the banking
industry to avoid any disruptions in the decision-taking process and to avoid excessive
use of risk. The framework adopted in the bank incorporates a comprehensive ALM risk
appetite framework and early warning signals help detect any possible alerts.
Considering the changes in the market environment, the bank considered multiple ways to
hedge against the increases in benchmark rates by engaging in profit rate swaps to hedge
some fixed income exposures, reducing the repricing frequencies of some corporate deals
and issuing long-term debt in a low-rate environment.
Nonetheless, the challenges are mainly linked to the lack of profit rate hedging
mechanisms and the availability of short-term instruments to deploy the excess liquidity.
From your perspective, what are the key initiatives that need to be
taken to address the current liquidity management issue?
Two key initiatives are needed: More local currency short-term liquidity products, and more
major currencies short-term liquidity products other than USD.
66
International Islamic
Liquidity Management
Corporation’s Role in
Addressing Liquidity
Management Needs
IILM
Overview
The IILM was created to address liquidity management challenges Corporation for the Development of the Private Sector (ICD) paved the way for a unique
collaborative, cross-border solution to a common, cross-border concern.
faced by the Islamic finance industry
The IILM members place a great value on governance and oversight. To ensure effective
The IILM is an international organisation established on 25 October 2010 by central banks oversight, its governance structure includes a governing board, a board executive
and a multilateral organisation to address liquidity management challenges faced by committee, risk management and audit committees along with a Shariah committee that
Institutions offering Islamic Financial Services (IIFS) through the creation and issuance of currently consists of four members of various nationalities. The representation on these
high quality, Shariah-compliant liquidity instruments. boards and committees includes governors along with senior officials from central banks
and a multilateral organisation.
Diverse member composition comprising central banks of Indonesia, Kuwait, Luxembourg,
Malaysia, Mauritius, Nigeria, Qatar, Türkiye, the United Arab Emirates as well as Islamic
IILM Snapshot
Date of Establishment October 25, 2010
Headquarters Kuala Lumpur, Malaysia
Primary Objective Provide Shariah-compliant financial instruments for effective cross-border liquidity management
Sukuk Issuance based on Wakala Structure. Fully-compliant with AAOIFI Standards. Three different tenors are offered every
Tool Used
month since the past three years with a total average monthly issuance size of US$ 1 billion.
Short-Term Credit Rating: A1 Short-Term Credit Rating: F1
S&P Global
Sukuk Rating Pool of Asset Quality and Sustained Fitch Ratings Pool of Asset Quality and Track Record
Ratings
Reissuance Since Inception of Performance
• Bank Indonesia • Central Bank of Nigeria
• Central Bank of Kuwait • Qatar Central Bank
Current Members • Central Bank of Malaysia
• Central Bank of the Republic of Türkiye
• Central Bank of Mauritius
• Islamic Corporation for the Development of Private Sector • Central Bank of the UAE
Total Issuance Amount Since Inception

234 Sukuk issues of total value of US$100.94 billion
(2013 – 2023)
68
IILM
Key Milestones
Inaugural US$2 billion short-term Sukuk programme by

IILM with a US$490 million issuance
First 4-month Sukuk issued by IILM
2010 2013 2014 2016 2017
IILM lengthens tenors with first 6-month Sukuk issued
Sukuk issuance programme increased to US$3.0 billion
The International Islamic Liquidity Management

Corporation (the IILM) was established
International Islamic Liquidity Management Corporation’s Role in Addressing Liquidity Management Needs
The IILM achieved several milestones during its 10 years serving

the Islamic finance industry
The IILM’s Sukuk programme has shown robustness in its qualitative and quantitative
expansion throughout the organisation’s 10-year journey. This ranges from issuing
several tenors to meet demand by different investors for short-term high-quality Islamic
Introduction of pricing discovery process through
competitive bidding auctions on Bloomberg instruments, upsizing its Sukuk program as well as securing high short-term credit rating
from different agencies.
IILM received second international programme rating

Sukuk issuance programme upsized to US$4.0 billion from Fitch
2018 2019 2020 2022 2023

Inaugural 12-month issuance by IILM, increasing the
number of tenors issued to 10
2-week, 3-week and 1-month Sukuk introduced. Total Sukuk issues by IILM crossed US$100 billion
Started offering three different tenors every month
70
IILM Sukuk Issuance
IILM Sukuk Issues

The IILM has played a significant role in shaping the Sukuk The IILM’s Sukuk represent a large chunk of international Sukuk sales: according to LSEG,
20% of international Sukuk issued in H1 2023 are by the IILM. The organisation also ranks
industry globally among the top Sukuk issuers globally so far in 2023, behind the governments of Malaysia,
Since its inception until 2023, the IILM issued 234 Sukuk with a total value of US$100.94 Saudi Arabia and Indonesia. It was also ranked the fourth overall top issuer of Sukuk for
billion. In 2022, the organisation issued US$13.88 billion of Sukuk and it has reached 2022, according to LSEG data. From 2018 to 2022, the IILM was the second top issuer for
US$11.52 billion in 2023. USD Sukuk, and it remains so in H1 2023.
IILM Sukuk Issuances

(USD Billion, 2013 – 2023)
16.00 120.00
14.12 13.88
14.00
100.94 100.00
11.95
12.00 89.42 11.52
9.85 75.54 80.00
10.00 9.30 9.03
8.11 61.42
8.00 60.00
6.40 49.47
5.80
6.00 40.44
40.00
32.33
4.00
22.48
20.00
2.00 0.98 13.18
6.78
0.00 0.98 0.00
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Issuance Per Year Cumulative Issuance
Source: IILM
IILM Sukuk Structure and Demand
Well-crafted Sukuk structure to meet market needs Organisation for Islamic Financial Institutions (AAOIFI)’s standards and they are tradable, as
discussed in the following pages. The structure of the Sukuk along with the underlying assets
The Sukuk instruments issued by the IILM are structured as Sukuk Wakala, with the issuer are approved by the IILM Shariah Committee via a fatwa that was reconfirmed in March 2023.
in this structure acting as the agent or Wakeel on behalf of the Sukuk holders. The IILM acts
The value proposition of the IILM Sukuk programme is that it is structured to gain wide
as the programme administrator and investment advisor that selects and recommends the
acceptance in terms of Shariah compliance. This will allow it to be easily marketed cross-
Shariah-compliant investment. The Sukuk’s underlying assets are based on market-standard
border. The IILM Sukuk is an important milestone as an Islamic short-term instrument. Due to
Sukuk structures. The aim is to have the highest tangibility versus financial ratio in the asset
different requirements and opinions, it took three years before the IILM debuted its program
pool. The current portfolio has a tangibility ratio of 79% with 21% receivables. The structure is
that was backed by liquid high-quality asset-backed Sukuk.
as illustrated on this page. The IILM Sukuk is fully compliant with the Accounting and Auditing
The IILM Sukuk Programme Structure
ASSET OBLIGOR ASSET OBLIGOR ASSET OBLIGOR
IILM Holding SPV (Luxembourg)
ASSET 1 ASSET 2 ASSET 3

E.g. Ijarah Sukũk E.g. Wakala Sukũk E.g. Musataha Sukũk
Wakala Agreement
IILM Issuer SPV Financial institution as Delegate Trustee,

A-1 and F1 S&P and Fitch short-term ratings
(Luxembourg) Issuing & Paying Agent and Account Bank
2% Timing reserve IILM as Programme Administrator

The IILM Short-term Sukũk
NETWORK AND PRIMARY DEALERS
Source: IILM
72
HIGHLIGHT: The IILM unique Sukuk offering allows it to be highly has been 79% since 2020 with the addition of two new assets, allowing it to be tradable in
the secondary market in most jurisdictions. With this, the weighted average turnover for
marketable in the secondary market the period between January 2022 and October 2023 is 19%. The highest volume traded
AAOIFI standard no. 59 that covers sale of debt and that took effect in several markets was seen in October 2023, totalling a volume of US$412 million and reflects the growing
at the start of 2021 impacted the Islamic banking and Sukuk markets as it concerns the acceptance of the IILM Sukuk as well as wider investor distribution compared to
rollover of debts and tangibility ratio of assets. For Wakala Sukuk, where the underlying previous periods.
assets are a mix of other financial assets (such as Murabaha, Salam, Mudaraba, For 2022 as reported by primary dealers, the highest trade activity was seen in the GCC. This
Musharaka), its tradability on the secondary market depends first on the tradability of the is attributed to the higher liquidity in the region with investors seeking high yields given the
underlying assets. According to AAOIFI, the threshold to permit trading is at least 33% increase in interest rates. The highest inter-regional trade was noted from Asia to the Middle
tangible assets while the OIC Fiqh Academy needs a minimum of 51%. East, then in the other direction from the Middle East to Asia. By country, Kuwait, the UAE,
The IILM’s Wakala Sukuk tangibility ratio passes the required limit and has always stood Oman and Türkiye were the most active markets. The IILM Sukuk also gained presence in
above 50% since the issuance of the organisation’s first Sukuk. In fact, the tangibility ratio non-core Islamic finance markets such as Palestine, Qatar, Switzerland and South Africa.
The IILM Sukuk Secondary Market Turnover
1,600 1,510 100%

1,400 1,340 90%
1,210 1,280 1,210 1,200
1,200 1,150 1,160 80%
1,200 1,120 1,120 1,090
1,000 1,030 1,030 980 70%
1,000 920
830 820 790 60%
780 740
800 50%
600 41% 40%
28% 37% 30%
400 24% 32% 20%
17% 12% 14% 19% 20% 17% 24% 22% 17% 20%
200 11% 11% 13% 20%
6% 3% 3% 10%
0 0%
Jan-22 Feb-22 Mar-22 Apr -22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23
Volume Traded (%) Monthly Maturing Position

Source: IILM. As of October 2023
74
IILM Sukuk Tenor
High demand for IILM Sukuk issues Islamic investors comprise the majority of all IILM Sukuk buyers. By investor category,
banks form the lion’s share, with Islamic banks making up 80% of total banks in 2022.
The deepening inversion of several parts of the US treasury yield curve is making the By region, Middle Eastern investors lead, specifically Kuwait (39%) and the UAE (11%).
IILM Sukuk profit rates more attractive to investors especially because investors need They are followed by Asia with Malaysia (10%) and Brunei (23%) dominating. Brunei was
to park their cash in less risky short-term investments while seeking to avoid volatility in a much bigger investor in 2022, from just 9% in 2021. Other countries buying IILM Sukuk
the market. In 2023, the IILM Sukuk were 205% subscribed on average with the highest- are Pakistan (4%), Oman, Nigeria, Singapore, Türkiye, Qatar (2% each), Saudi Arabia, Sudan,
recorded coverage ratio for the 1-month Sukuk in April 2023 (357%). Switzerland, Palestine, and South Africa (1% each).
Sukuk Investors Breakdown

(2022)
Source: IILM *Supernational, sovereign wealth

funds, ministries of finance and
central banks
HIGHLIGHT: IILM Sukuk asset portfolio position it among most rating of “A” by S&P and Fitch. By region, its portfolio to-date is also based on assets from the
GCC and supranationals.
highly-rated issues
The IILM Sukuk received the second-highest short-term ratings from S&P and Fitch, based on
To support demand for high-quality assets, the IILM follows a robust eligibility criterion for their high asset quality, track record and sustained reissuance. The strong ratings meet the
funding with credit enhancements and guarantees. It has mid- to long-term asset-backed needs of investors seeking highly-rated Sukuk, which is already evident by the wider range of
funding with investment assets of US$3.51 billion as at December 2023 (considered as investors of such Sukuk in the secondary market.
1:1 issuance to asset ratio). Its asset portfolio is based on sovereigns, government-related
entities and supranational entities via Shariah-compliant assets with a minimum long term
New one-year international Sukuk and upsized programme supports the offering of Islamic liquidity instruments in local currency by regulators such
as the Central Bank of Oman and Bank of England. Sukuk issuance by the IILM are also
launched to meet rising market demand supported and distributed by ten multi-jurisdictional primary dealers to facilitate global
The 2023 IILM Sukuk programme is issued in four different tenors: 1-month, 3-month, 6-month distribution. Previous IILM Sukuk were 2, 3, 6-week as well as 2, 4, and 7-month tenors.
and 1-year. The 1-year Sukuk debuted in June 2022 and is believed to be the world’s first Diversification is key to meet investors’ demand and the IILM is on track to meet this.
international issuance of its kind, a sign of the growing importance of IILM issues for the Another sign of the development of the IILM Sukuk is the growth of its annual programme,
industry. The 1-year Sukuk was released when issuances were slowing as market participants enlarging from US$3 billion to US$4 billion since September 2020. This was at a time when
waited for central banks to respond to high inflation rates that prevailed at the time. The 1-year economies were unravelled by the COVID-19 pandemic and authorities took unprecedented
Sukuk was oversubscribed by 1.85 times. A similar issuance in October 2022 was similarly monetary and fiscal measures. During that uncertain period, liquidity management became
oversubscribed, by 1.98 times, another issuance in June 2023 was oversubscribed by 1.81 even more important and IILM Sukuk served as a refuge for investments for Islamic
times and another issuance in October 2023 was oversubscribed by 242%. financial institutions.
Such Sukuk issuances help build a benchmark yield curve up to 12 months to address the
different liquidity needs of Islamic banks and other institutions globally. The 1-year tenor
IILM Sukuk Issuance by Tenor

(USD Million, 2013 – November 2023)
60,000 57,950
50,000
40,000
30,000
19,750 17,740
20,000
10,000
1,600 1,060 1,040 1,010
0
3 Month 1 Month 6 Month 4 Month 2 Month 12 Month Other Terms
Source: IILM
76
Interview with
First Abu Dhabi Bank
NADINE WINDSOR From your perspective and given your market interactions,
HEAD OF FIXED INCOME TRADING, what do you consider to be the current state of Islamic liquidity
FIRST ABU DHABI BANK management solutions in the Islamic finance industry?
Over the last few years, we have seen an acceleration in the shaping of the Islamic finance
industry, in particular Sukuk. Some GCC countries are witnessing an increased level of
regulation in the space. For example, the UAE has adopted the AAOIFI standards. The
combined challenging market conditions since the pandemic and the high volatility in the
interest rate markets are leading to a flight to quality from fixed investors seeking higher
returns without wanting to compromise on credit quality. Many were sitting on the sidelines
waiting to deploy significant amounts of cash, as deposits quickly became a source of
wealth erosion instead of a safe haven. The IILM programme positioning in terms of
tenors and maturity offerings is an attractive proposition to both regional and international
Nadine Windsor is currently the Head of Fixed Income Trading at First Abu Dhabi Bank, which
is one of the largest banks in the Middle East. She has 18 years of experience in the banking
investors. It has been receiving an increased level of attention along with the significant
industry and started her career working at Lehman Brothers in London before moving to the interest that money market funds are receiving, especially since the successful addition of
United Arab Emirates in 2009. She has a comprehensive understanding of global markets, having the 12-month tenor Sukuk. With 20% of the total Sukuk issuance, the IILM programme has
worked as a research analyst, trader and portfolio manager in fixed income and equity markets. established itself as a strong reference in the USD short-term Sukuk market for Islamic,
Nadine has a Masters in Accounting and Market Finance from HEC Paris, a leading European but also surprisingly for conventional, investors.
business school.
Given your experience and market engagement, what is the From your perspective, what is the impact of the IILM Sukuk
current demand for IILM Sukuk, and how is the supply side programme on Islamic liquidity management, and what should
responding to meet such demand? IILM do to continue to play an effective role in supporting the
The structural differences between the conventional and Islamic instrument are often
Islamic finance industry?
attributed to scarcity in both the primary and secondary markets. The demand for Sukuk Given the increased amount of cash investors are sitting on, Islamic liquidity management
is growing faster than the primary issuances. Since the peak we saw in 2014 where 40% has become a priority for local and regional banks, as well as regional and international
of the newly issued instruments were Sukuk, that figure hovered between 20% and 30% investors and issuers. The IILM Sukuk programme is a key tool and is being increasingly
between 2015 and 2022. In the first half of 2023, 33% of the GCC issuances were Sukuk. seen as an effective diversification instrument given its supranational issuer. The growth
Despite acute interest rate volatility during that period, issuers found windows to address of the programme has been impressive over the last few years as demonstrated by the
their financing and refinancing needs. sustained growth in the volumes traded on the secondary market. As interest in the
programme grows, the market will be more demanding when it comes to additional
The primary markets are trying to catch up with strong Sukuk issuance growth after a
instrument ratings. In addition, as a natural extension of the liquidity of the Sukuk
lacklustre 2022, which saw the lowest Islamic issuance from the GCC and Egypt, with
programme, it will at some point become critical to develop and expand the repo market
US$12.2 billion issued vs US$26 billion printed during 2021. During the first half of 2023,
for such instruments. The IILM Sukuk programme is supported by a strong team and is
we saw a total GCC and Egypt Sukuk issuance of US$11.4 billion, with another 6 months
perceived as a solid partner by market participants, including primary dealers and end
of issuances in front of us. Looking ahead, more than US$20 billion worth of Sukuk will
clients. A large part of that impressive success goes to their credit. They are preparing for
be maturing each year in 2024, 2025, and 2026. The Sukuk primary space will continue to
the next steps of the programme growth and market conditions are looking like they want
be under the spotlight and we believe that the demand for the IILM Sukuk will continue to
to improve for fixed income instruments.
strengthen in the coming quarters, as it grows into a cornerstone role of the Sukuk world
(Figures sourced from FAB Market Insights Publications).
Over the last few years, we have

seen an acceleration in the shaping
of the Islamic finance industry,
in particular Sukuk.
78
Acronyms
AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions IIFS Institutions offering Islamic Financial Services
ALF Alternative Liquidity Facility IILM International Islamic Liquidity Management Corporation
BNIBFI Bank Negara Interbank Bills Foreign – Islamic ISRA International Shariah Research Academy
BNM Bank Negara Malaysia LCR Liquidity Coverage Ratio
BoE Bank of England LIBOR London Interbank Offered Rate
CBB Central Bank of Bahrain LSEG London Stock Exchange Group
CBO Central Bank of Oman NSFR Net Stable Funding Ratio
CCM Collateralised Commodity Murabaha OIC Organisation of Islamic Cooperation
CM Collateralised Murabaha RFRs Risk-Free Rates
ESG Environmental, Social and Governance SAMA Saudi Central Bank
GCC Gulf Corporation Council SBBA Sell and Buy Back Agreement
HQLA High-Quality Liquid Assets SCB Standard Chartered Bank
ICD Islamic Corporation for the Development of the Private Sector SDGs Sustainable Development Goals
IFSB Islamic Financial Services Board SNB Saudi National Bank
IIFM International Islamic Financial Market

Contributors
Shereen Mohamed, Senior Research Analyst
London Stock Exchange Mustafa Adil, Head of Islamic Finance

Group, Data and Analytics Shaima Hasan, Senior Proposition Manager
Emmy Alim, Contributor
Hichem Bouqniss, Executive Director

International Islamic Lee Wan Mone, Executive Director
Liquidity Management
Corporation Zakaria Thiyfa, Vice President
Danial Idraki, Associate Vice President

80
Global Islamic Liquidity

Management Report 2023

Global Islamic Liquidity Management Report 2023

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iilm.

Message from LSEG 6

Introduction to Islamic Finance 12

Liquidity Management Landscape 19

Key Liquidity Instruments 29

Islamic Repo Instruments 43

Liquidity Risk Management by Islamic Financial Institutions 53

International Islamic Liquidity Management Corporation’s

The report also explores key liquidity management instruments

To address these challenges and provide an updated picture of Mustafa Adil

Islamic Liquidity Management Tools

Challenges Facing Islamic Liquidity Management

Solutions to Address Islamic Liquidity Management

Total Issuance Amount Since Inception

Sukuk Issuance based on Wakala Structure. Provide Shariah-compliant financial instruments

IILM Sukuk Issues Nature of Investors

Islamic Finance Assets Growth Islamic Finance Assets

2016 2017 2018 2019 2020 2021 2022 2027

Source: ICD – LSEG Islamic Finance Development Report 2023

Islamic finance seen developing around the world

Introduction to Islamic Finance

Top Countries in Islamic Finance Assets

Countries Islamic Finance Countries with Central Number of Shariah

Source: ICD – LSEG Islamic Finance Development Report 2023

Introduction to Islamic Finance

Historically, liquidity management in Islamic finance has faced significant challenges

• Standardisation and Regulatory Frameworks: Regulators and industry bodies

Introduction to Islamic Finance

Liquidity Management Landscape

Average Asset Allocation by Islamic Funds

Liquidity Management Landscape

US Federal Reserve Target

Source: LSEG Workspace

Liquidity Management Landscape

Liquidity Management Challenges for Islamic

Liquidity Management Landscape

Liquidity Programmes and Instruments

Country Product Tenor Liquidity

Sukuk Al Salam 91 days Not tradable

Bahrain Sukuk Al Ijara 180 days Tradable

Mudaraba Sukuk Up to 364 days Tradable

Islamic Treasury Bills – Ijara 14 days Tradable

Gambia Sukuk Al-Salam Bills 3 – 12 months Not tradable

Bank Indonesia Sukuk Instrument (SuKBI) – Musharaka 1 week – 12 months Tradable

Kuwait Tawarruq with Central Bank 3 and 6 months Not tradable

Key Liquidity Instruments

Country Product Tenor Liquidity

Wadi’ah Acceptance Overnight – 3 months Not tradable

Mauritania Islamic Treasury Bills Up to 180 days Tradable

CBN Non-Interest Note Up to 12 months Transferrable at par

Nigeria CBN Non-Interest Asset-Backed Securities Up to 12 months Tradable

CBN Non-Interest Special Bills Determined by Central Bank Not tradable

Türkiye Short-Term Government Lease Certificates – Ijara Up to 12 months Tradable

Collateralised Murabaha Facility Overnight – 3 months Not tradable

Wakala Deposit by Central Bank in Islamic Banks Perpetual Not tradable

Dirham T-Sukuk – Ijara 2, 3 and 5 years Tradable

Source: LSEG Analysis, October 2023

IFSB defines such instruments as: