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CENTRAL BANK OF THE U.A.E. 2005

CENTRAL BANK OF THE U.A.E. 2005. Avenues for investing liquidity in an Islamic Banking environment. Presentation by: Mr. Ahmed Abbas - Chief Executive Officer www.lmcbahrain.com. 10 December 2005. Liquidity management in an Islamic framework.

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CENTRAL BANK OF THE U.A.E. 2005

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  1. CENTRAL BANK OF THE U.A.E.2005 Avenues for investing liquidity in an Islamic Banking environment Presentation by: Mr. Ahmed Abbas - Chief Executive Officer www.lmcbahrain.com 10 December 2005

  2. Liquidity management in an Islamic framework Liquidity Management has predominantly been Commodity murabaha (short term) within the Islamic framework as a liquidity management tool Well established commodity exchanges Lack of viable liquid alternatives Relatively standardised documentation templates Critical mass of market participants Acceptable/high grade counter parties End results: Habitual tendency of market participants to move towards murabaha based products No concerted commitment to development of alternatives

  3. Liquidity management in an Islamic framework • Recent developments: • Salam Sukuk • Islamic banks have availed the opportunity to invest in short term Salam Sukuks by Governments or quasi Government obligors. These type of instruments are not tradeable as per Sharia guidelines of “monies” not being allowed to be traded • Ijarah Sukuk - Tradeable • The 1st public sukuk was offered by the Bahrain Monetary Agency (BMA) in August 2001 for US$ 100 million. Followed by other sovereign sukuks: • Malaysia • Qatar • Dubai • And more BMA sukuks • More recently the BMA has launched a program of short term Ijarah Sukuks (6 months - tradeable)

  4. Liquidity management in an Islamic framework How can the Islamic Capital Markets be further developed: Offer Islamic instrument pricing in a transparent and accessible manner per the conventional market Publicise Islamic issuances to a broader cross-section of the global banking industry

  5. Liquidity management in an Islamic framework Establish regional hubs of exchanges Enhance Depth of market and technical expertise Increase breadth of high volume market participants with expansive geographical presences Work towards homogenisation of products Strive towards maturity of coordinated Cross-border institution and product regulation

  6. Liquidity management in an Islamic framework Increased Regulatory Agency involvement and direct sponsorship of Islamic products Financial incentives Regulatory carve-outs or staged development of frameworks to new product categories Consistent regulation of cross-border entities etc.

  7. Liquidity management in an Islamic framework An example of what could be done? Focus on developing viable alternatives based on other underlying “commodities” or “assets” The longer term “Sukuk” could be used as such a liquidity tool/instrument if re-parcelled: LMC’s Short Term Sukuk Program repackages longer instruments into monthly maturity certificates Guaranteed monthly entry and exit dates Intra-month entry and exit also available (no penalties) Flexibility of investment amounts Fully secured by underlying Sukuk portfolio Monthly returns

  8. Liquidity management in an Islamic framework Increase of Primary Issues Increasing market transparency and trading activity Provide financial institutions, corporates and project entities with a viable structured/project finance alternative Pressure the regulators to enhance their Islamic regulatory regimes and their enforcement of them

  9. Liquidity management in an Islamic framework Work towards greater standardisation of accounting treatments and disclosures of Sukuk instruments Increase knowledge about benchmarking for the purposes secondary market pricing of Sukuk instruments Develop Sukuk market indices Establish Legal & Regulatory Framework issues and better clarification & understanding by regulators Uniform rules amongst GCC regulators /central banks needed Benefit from the experience of the Malaysian model

  10. LMC & Our mandate Replicate the Capital Market Instruments Islamicly and enhance their liquidity The size of the primary market is purely a product of the time for which it has been operational and hence should not be a concern All the secondary market needs is 2-3 more years to emerge as a transparent and acceptable market

  11. LMC & Our mandate Some key essentials for the development of the secondary market are: Shari’a convergence – particularly between the GCC and Far East Increased rating of Sukuks Listing of instruments on accepted regional stock exchanges – e.g. Bahrain, Dubai, Kuala Lumpur etc. Track record of Sukuk instruments Improved access to/ distribution of Sukuk pricing

  12. LMC & Our mandate Increased primary market depth will offer buyers and sellers with “replacement” assets hence reducing the apprehension of not being able to source an alternative Break down the “buy to hold” mentality Publication of known executed trades

  13. Any Questions? Thank you.

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