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Tuesday, 21 April 2015

IFSB guidance for Islamic banks may spur sukuk issues, deposit insurance

The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released final guidance on liquidity risk management for Islamic banks, which may spur national authorities to issue more sukuk and establish sharia-compliant deposit insurance schemes.
The guidance note, known as GN-6, clarifies the tools that Islamic banks can use to meet Basel III regulatory requirements, now being phased in for both conventional and sharia-compliant banks around the world.
It defines the types of high-quality liquid assets (HQLA) that Islamic banks can hold and the weights that should be assigned to Islamic deposits, which can be more volatile than conventional ones for various reasons, including the fact that they have relatively short maturities.
HQLA must have low correlation with risky assets, an active secondary market and low volatility. The highest level of HQLA includes sukuk (Islamic bonds) issued by sovereigns, multilateral development banks and the Malaysia-based Islamic Liquidity Management Corp.
Such HQLA should be accepted by central banks as collateral in their liquidity facilities, the guidance note says. The note could therefore encourage issuance of HQLA and local currency sukuk by sovereigns and their central banks, credit rating agency Standard & Poor's said in a research note.
"Based on the size of the Islamic finance industry, its composition, and its growth trajectory, we estimate the need for HQLA to reach about $100 billion in the next few years," S&P added.
The guidance note also details three arrangements that regulators can use to meet Basel III requirements in more undeveloped banking markets: central bank liquidity facilities, foreign currency HQLA that could be used to cover domestic currency liquidity needs, and expanded use of lower-level HQLA.
In the long term, the guidance note will also encourage regulators to develop Islamic deposit insurance schemes to reduce the need for HQLA, S&P said.
The note says such schemes could significantly lower the run-off rates, or weights, that are assigned to deposits. The riskier the funding source, the larger the amount of HQLAs needed to cover deposits.
For deposits classified as "stable", the IFSB guidance applies a 5 percent run-off factor, but this can be cut to 3 percent if a deposit insurance scheme is in place that is based on a prefunding system and is available quickly.
For less stable deposits, a minimum run-off rate of 10 percent is to be applied, the guidance note says.

The IFSB note classifies foreign currency-denominated retail accounts, which are large at some Islamic lenders, in the less stable category.
(Reuters / 20 April 2015)
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Azerbaijan’s Islamic banking skills to drive Russian Islamic finance development

Islamic finance industry in Russia still needs to be developed, despite some 20 million Muslims living in the country, and Azerbaijan’s skills maybe helpful for Russia.
Russia hopes to learn from the experience of Azerbaijan in the field of Islamic banking, said Sergey Drobyshevsky, the scientific director of the Gaidar Institute for Economic Policy in Baku last week.
He said the presence of IBA Moscow, a Russian subsidiary of the International Bank of Azerbaijan, the largest lender and the only state-owned bank in Azerbaijan, must contribute to this.
Drobyshevsky believes it will be easier for the Azerbaijani banks and businessmen to work in Russia than the Malaysian specialists of that sphere, where Islamic banking is also developed.
“There is no language barrier between Azerbaijan and Russia, they have similar culture and a lot in common,” said Drobyshevsky.
He also touched upon the prospects for the development of Islamic banking in Russia.
“The more financial instruments the market has, the more differentiated they are, the more effectively it helps investors to diversify their risks, according to the theory of finance,” he said. “These are new possibilities and their implementation does not depend on the state - it depends on the participants of the market themselves and potential customers of Islamic banking.”
Islamic banking can claim only 5 percent of the Russian financial market during 5-10 years, but the main thing is to start the process, Drobyshevsky emphasized, Trend reports.
Behnam Gurbanzada, the director of Islamic banking at the IBA, earlier called Russia a "promising" platform to further the development of Islamic finance.
“Azerbaijan with all prerequisites to build a bridge between Asia and the Middle East, as well as between the CIS and the Gulf countries, is supposed to receive good financial dividends from applying Islamic banking. The IBA is keen to develop a plan of amendments to the regulatory to apply the full-fledged Islamic banking in the country. The amendments can fasten up the process of creating the Islamic development center in Azerbaijan,” he told AzerNews earlier.
The Baku-based IBA is a universal bank with subsidiary banks in Russia, Georgia and Qatar, as well as representative offices in London, Frankfurt, Luxembourg, Dubai and New York. The bank, 50.2-percent owned by the Azerbaijani Ministry of Finance, holds over 40 percent of banking assets in the country.
The IBA‘s reported consolidated total assets of 8.8 billion manats, aggregate capital of 1.008 billion manats and net profit of 64.5 million under audited IFRS as at year-end 2014.
(Azernews / 20 April 2015)
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