Islamic financial services industry in ME is seeking more short-term funding sources and liquidity management tools

(Gulfnews, 24 June 07) Dubai: As Islamic finance becomes a major part of the local and regional financial system, the Islamic financial services industry in the region is increasingly seeking more short-term funding sources and liquidity management tools. Last week Islamic mortgage lender Amlak signed an $800 million 360-day Wakala facility with Emirates Islamic Bank. Wakala is an Islamic financial contract in which an investor places cash with a lender who then uses it to buy qualifying financial assets. The investor gets a commission and a share of the profits generated by the funds. "The efficiency of the structure that we have agreed with Emirates Islamic Bank will increase Amlak's liquidity in the short term," said Arif Alharmi, CEO of Amlak Finance. A big obstacle to the growth of Islamic finance is the long-term nature of many Islamic products and the absence of short-term liquidity management tools. For example, Murabaha, a contract for purchase and resale allows the customer to make purchases without having to take out a loan and pay interest. The bank purchases the goods for the customer, and re-sells them to the customer on a deferred basis, adding an agreed profit margin. Here, the debt as an asset remains illiquid and non-tradable. Sukuks (Islamic bonds) are also long term in nature. Liquidity in sukuk continues to remain elusive even on the Dubai International Financial Exchange, the largest sukuk exchange in the world. "Despite the rapid evolution of Islamic bond markets, we have yet to see the emergence of short-term management products. It calls for the cooperation of all stakeholders in the industry," said Abdullah Haron, assistant secretary general of Malaysia's Islamic Financial Service Board. In the absence of a money market, Islamic institutions are forced to keep huge sums in unproductive cash to meet their short-term liquidity needs. "We recognise the need to create a money market for Islamic institutions, but they need to come up with appropriate Sharia-compliant short-term asset-backed instruments. We will support their efforts," Sultan Nasser Al Suwaidi, UAE Central Bank governor told Gulf News recently. An Islamic equivalent of repos, sales and repurchase agreements is under consideration. Creating a repos market is hard in the region as many countries do not have active government debt markets. The absence of interest poses a challenge when it comes to pricing these short-term instruments and identifying Sharia-compliant underlying assets for Islamic repos.