Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School...
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![Page 1: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/1.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Islamic Liquidity Management Issues
• ISLAMIC BANKING AND FINANCE
• Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon
• February 23–24, 2006
• Warren Edwardes, ceo, Delphi Risk Management Limited
• e: [email protected]
• w: dc3.co.uk
![Page 2: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/2.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Delphi’s website contains:
• articles on Islamic banking on:dc3.co.uk/ibnews
• The full speech will be on: • dc3.co.uk/IslamicLiquidity060218.pdf• with PowerPoint on • dc3.co.uk/IslamicLiquidity060218.ppt
![Page 3: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/3.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
thoughts on liquidity
• More than listing• Is there a buyer when
you are a seller?• More than negotiable• At what price?
![Page 4: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/4.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
thoughts on liquidity
• British Gas• Falklands War• Dumping of Aaa A1-P1+CP• Don’t hold paper in the news
![Page 5: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/5.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
thoughts on liquidity
• Midland Bank• Crocker bank led to
dumping of Midland CDs
• Don’t hold paper in the news
![Page 6: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/6.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
thoughts on liquidity
• Continental Illinois• Plenty of “liquid” assets• No diversification of
liabilities• mainly wholesale and few
retail customers
![Page 7: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/7.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
thoughts on liquidity
• Access to determinate amount of cash• When you need it• Preservation of capital on demand• Free from price risk• Undoubted quality low credit risk and
be seen to be so• Need a quality Triple-A overnight
instrument with stable capital values
![Page 8: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/8.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Background to Islamic liquidity
“Islamic banking is having a growth spurt. ….
shortage of inter-bank liquidity, …
signs that tentative moves are being made to address these shortcomings.”
Middle East Economic DigestDecember 19, 1997 – over 8 years ago!
![Page 9: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/9.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Background to Islamic liquidity
• Asset/liability gap management• Shortage of instruments• LMC /IIFM initiatives
– Numerous Sukuks including Malaysia, Bahrain & IDB Sukuks
• Liquidity and price transparency is required for an active secondary market
• Issues oversubscribed but minimal trading• This lack of liquidity paradoxically increases
the demand for liquidity
![Page 10: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/10.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
liquidity management
• Investments long dated – deposits are short– massive gap– Massive liquidity problem
• Need flexibility with Shariah compliance• Sukuks held to maturity• Short selling?• Stock borrowing?
![Page 11: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/11.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
liquidity management
• LME Murabaha is main destination– Bilateral transactions– Counterparty limits
• Some funds exist– But not capable of market size
transactions• Segmentation inevitable• Co-operation needed with a market
level solution
![Page 12: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/12.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
No Inter-bank market
• Balance sheet management problem• Cannot easily finance when there are
withdrawals• So more liquidity than needed by a
conventional bank• Bilateral Murabaha with break clauses is
widespread• liquidity vehicles cannot withstand a
$100million injection or withdrawal
![Page 13: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/13.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Risk Pyramid
• Sound ALM requires a quality / liquidity pyramid.
• Most liquid is USD bill or note– Nil earnings but price stability vs USD
• Then a range of bonds from super nationals to governments and funds– Most with price risk– Some with earnings volatility but fixed price
• No such highly rated Islamic instruments
![Page 14: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/14.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Risk Pyramid
• Governments reserves are in gold and government Triple-A paper
• Fiduciary or trust money should be both liquid and safe and price risk free
• Basle II is approaching• Even before that sound risk
management principles apply
![Page 15: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/15.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Risk Pyramid
• Pyramid of risk• Blended portfolio from
Triple-A down to Single-B• Can interpolate risk
between Triple A and Single-A
• Cannot extrapolate risk from lesser risks to triple-A
![Page 16: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/16.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Risk Pyramid
• Risk / return trade-off in conventional markets
• Add to this the Halal / Haram trade-off
• Need Triple-A Halal instruments
![Page 17: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/17.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Conclusion & summary
• Sukuks bought to hold– minimal secondary market for on sale– Mark to market and price determination is difficult
• Shortage of paper• Is debt trading really Halal?• Novation agreements
– Cancellation of original purchase and replacement with new owner in contract note
![Page 18: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/18.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Conclusion & summary
• Asset / Liability problem– Long term asset fixed and short term
variable deposits
• No derivatives – yet!– Gharrar?– Financial Takaful?
![Page 19: Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCE Lebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February.](https://reader033.fdocuments.in/reader033/viewer/2022052509/56649c825503460f9493a17f/html5/thumbnails/19.jpg)
Warren Edwardes
Islamic Liquidity Management Issues ISLAMIC BANKING AND FINANCELebanese American University, School of Business, Irwin Hall, Beirut, Lebanon February 23–24, 2006
Conclusion & Summary
• Lack of short term instruments• Sukuks are medium plus term• Not price stable or really liquid• Shortage of credit lines• Wanted an overnight Triple-A, market-
sized, liquid, inter-bank market solution where institutions can park their reserves