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S&P: Basel III liquidity requirements could resolve weaknesses in Islamic Finance 

April 1, 2015

Matthew Amlot, CPI Financial

In October 2014, the Islamic Finance Services Board (IFSB), an international standard-setting body of regulatory and supervisory agencies that aims to ensure the soundness and stability of the Islamic finance industry, published guidance on quantitative measures for liquidity management in institutions offering Islamic financial services. This note (IFSB-GN-6) set three main characteristics of high quality liquid assets (HQLA): low correlation with risky assets, an active and sizable market, and low volatility. The guidance also specifies how Islamic banks should implement the liquidity coverage ratio (LCR) and the net stable funding ratio related to Basel III, as well as the timeline for implementation.

Most Islamic bank liquidity management instruments currently consist of low-profitability assets, such as cash and central bank deposits. Sukuk are primarily offered as over-the-counter instruments and only a limited amount of them are listed on developed and liquid exchanges.

However, the report says the implementation of Basel III and its new liquidity coverage ratio could increase offerings of liquidity management instruments.

Read more: CPI Financial

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