1. Liquidity Management
and Sukuk Markets
Salman Khan

2. Liquidity Management
Comprehensive overview to understand subject matter
What is liquidity management (LM)
Important to whom & why
Obstacles to satisfactory LM & why (imp/storyline**)
Current LM tools
Sukuk and LM
How can Sukuk help in better LM
Challenges

3. Liquidity Management Liquidity management (LM)
Important:  liquidity risk
Liquidity risk (LR):
Risk arising from lack of marketability of an investment , security, or hard asset to cash at appropriate price
w/o loss of capital/ Y /appropriate ∏
“inability to sell”
Immediate needs
Higher LR:
value of assets/business
Risky operation

4. Liquidity Management Specifically for financial institutions:
Need to ‘match’
Maturities
Liabilities and assets
Keep sufficient funds to meet financial commitments
Related: ability to collect deposits
Deal with short-run pressures relating to demands on the FI

5. Liquidity Management To whom Financial institutions (FIs) Corporates
Businesses
Institutional investors
Sovereigns
Individuals
Most relevant: FIs

6. Liquidity Management Within context:
==> Financial institutions (key relevance)
Majority of substantial problems:  LM
Relevant to overall financial stability
Potential: collapse of banking system
==> Regulatory interest
Crucial: to strengthen LM fr/w

7. Liquidity Management Key primary obstacle: Most LM tools? Challenge?
Operating within conventional banking fr/w (IBF in general)
Most LM tools?
Interbank money market
Secondary market financial instruments
Discount window of central banks
All?
Challenge?
Find SC LM tools
Asset-based/other SC modes

8. Liquidity Management Main LM tools available at present:
Commodity Murabaha (Tawarruq)
Interbank deposits
Wakala
Mudaraba
Musharaka
Sukuk
Malaysia:
a) Mudarabah Interbank Investment (MII)
b) Wadiah Acceptance
c) Government Investment Issue (GII)
d) Bank Negara Monetary Notes-i (BNMN-i)
e) Sell and Buy Back Agreement (SBBA)
f) Cagamas Mudharabah Bonds (SMC)
g) When Issue (WI)
h) Islamic Accepted Bills (IAB)
i) Islamic Negotiable Instruments (INI)
j) Islamic Private Debt Securities
k) Ar Rahnu Agreement-I (RA-i)
l) Sukuk BNM Ijarah (SBNMI)

9. Liquidity Management
Main obstacles vis-à-vis LM (using existing tools)
Volume
SC financial instruments
Inter-bank dealings
Secondary market
Alternative to “lender of last resort”?
Sharia rulings < >

10. Developing a secondary market
Liquidity Management
Developing a secondary market
Key tool at present: Commodity Murabaha (volume)
Issues?
Credentials (AAOIFI/IFA)
Inefficient (fixed)
Tradeable X (altho’ alternative used)
Bursa Souq Al Sila (Malaysia)
Projected alternative to LME (CM) - Commodity trade
Issues:
Commodities ‘irrelevant’
Cash exchange
Vis-à-vis CM?

11. Liquidity Management Currently: separation
Malaysia / ‘Rest of the world’

12. Liquidity Management Malaysia:
Regulatory & legal infrastructure very well developed
Accounts for over 60% of all sukuk issuances
Market’s average annual growth of 15% over last decade
Market largely local/insular
Some change recently
Saudi sukuk issue (RM 200m, Al Bayan)
Govt now actively encouraging foreign sukuk issuers
However: noteable difference in Sharia rulings
Many of which facilitate sukuk structuring and trading
Related: Sharia credentials; debt trading; ‘Ina

13. Liquidity Management “Sukuk  LM ” Sukuk issuance:
How can Sukuk help?
“Sukuk  LM ”
Sukuk issuance:
Large volumes, upward trend
110 (2014), 125*(2015), 250*(2020)
LM solved?
Understand: Primary vs secondary
Primary: LT pb/pv (mainly individual LM)
Secondary: LM
Primary ; secondary?
Secondary
Figures in USD billions; * Projected

14. Liquidity Management Emphasise - KEY:
How can Sukuk help?
Emphasise - KEY:
=>Tradeability of Sukuk, i.e. development of secondary market
Issuance alone X
Trading
Many associated issues

15. Liquidity Management Tradeability – issues: Key: “Buy and hold”
How can Sukuk help?
Tradeability – issues:
Key: “Buy and hold”
Why?
Other options?
Perceived ‘good quality’ investment
Ratchet effect: tradeability
Spread between “bid” and “ask” too high
Function of D&S
Low volumes
Malaysia exception: easy to trade (?)

16. Liquidity Management Tradeability – issues:
How can Sukuk help?
Tradeability – issues:
Developing infrastructure for trading of Sukuk
Developed financial markets: easier
Expanding financial regulation  cover Sukuk fully
All aspects
Taxation
Default
Why easier - proviso? (why? ABS v ABK)

17. Liquidity Management Tradeability – issues:
How can Sukuk help?
Tradeability – issues:
Limited by structures (trade)
Mudaraba, musharaka, Ijara
Murabaha, Istisna, Salam
Hybrid? (discuss)
Sharia-credentials
Global marketability/acceptability of existing
ABS vs ABK: long term health/plausbility

18. Salam Sukuk (Bahrain CB)
Liquidity Management
Salam Sukuk (Bahrain CB)
Salam Sukuk: presently used
Central Bank of Bahrain
ST LM
91d
Issues:
Volume
Tradeability: primary
Synthetic?

19. Liquidity Management Salam Sukuk
Salam Seller (Islamic Bank)
(2)
(3)
Salam Agreement
(1)
(4)
Investors
(Sukuk holders)
3P Parallel Salam Buyer
SPV
(1’)
(4’)
Parallel Salam Agreement
1 – Salam Sukuk issued
1’- Fund raising – collecting proceeds from the investors
2 – Cash transferred to Salam Seller
3- Goods (commodities) are delivered at maturity
4- Goods delivered at maturity
4’- End buyer pays Sukuk proceeds + margin (to be redeemed to Sukuk holders)
N.B.: Parallel Salam Agreement at outset, to sell commodities upon delivery in market on behalf of sukuk holders

20. Developing a secondary market
Liquidity Management
Developing a secondary market
Secondary market: some endeavours to date
Liquidity Management Centre (Bahrain, 2002)
“Facilitating investment of surplus funds of Islamic banks and financial institutions into quality short-and medium-term SC financial instruments”
Not very active (recent years)
Still has comp-ad over Malaysia (vis-à-vis Europe)
Shareholders:
Bahrain Islamic Bank
Dubai Islamic Bank
Islamic Devt Bank
Liquidity Mgmt House

21. Developing a secondary market
Liquidity Management
Developing a secondary market
International Islamic Liquidity Management Corporation (IILM) (Malaysia, 2010)
Established by central banks, monetary agencies and multilateral organisations to introduce and facilitate effective cross-border SC liquidity transactions
Debut Sukuk: USD 490m (Aug 2013)
Aim: current LM products (CM/Salam) will be replaced by IILM’s ST sukuk
Potential benefits
Currently: much to do
Sukuk trading: Malaysia
Shareholders
Bank Indonesia
Central Bank of Kuwait
Islamic Development Bank
Banque Centralle de Luxembourg
Bank Negara Malaysia
Bank of Mauritius
Central Bank of Nigeria
Qatar Central Bank
Central Bank of the Republic of Turkey
Central Bank of the UAE

22. Liquidity Management Primary issuances (also LM)
Points to ponder
Primary issuances (also LM)
“Equity vs debt” (relevant to discuss)
Theoretical “attraction” of sukuk
What is it?
Discuss

23. Liquidity Management Primary issuances (also LM) “Equity vs debt”
Points to ponder
Primary issuances (also LM)
“Equity vs debt”
Debt
Majority
New participants (SA, HK, Jpn, Ire, Kzk, Brm, Frn, Chn, Ind, Aus, Afr x)
Conventional sources?
Gulf liquidity: xs
“paradigm of debt demand and supply”: perils
Linked to ABS vs ABK
Solution:
“Equity sukuk”
Opinion?

24. Liquidity Management Primary issuances (also LM) Equity sukuk:
Points to ponder
Primary issuances (also LM)
Equity and debt
Equity sukuk:
Repeated:
“Potentially/theoretically huge scope for large projects” (infrastructure devt; project finance) (covered in separate session)
Effective LM tool for sovereigns, corporates, etc
Savings X
ABS v ABK
Market stability Vulnerability

25. Liquidity Management Equity sukuk: Key challenges: ABK
Points to ponder
Equity sukuk:
Businesses: ST capital / LM requirements
Inventory/goods/fixed assets
Again: ABS v ABK
“Huge market/potential”
Key challenges: ABK
Acceptability “actual v proclaimed”
“commanding heights”
Price
Inventory/assets