Whilst there have been a number of Islamic
Sukooks (Islamic Bonds) issued recently, most of
the paper is bought to hold rather than trade. Thus
liquidity is a problem both for on sale and price determination and mark
to market is difficult. This is a result of a
combination of two factors. There is a shortage of
quality paper issued into the market and also the view in
some quarters that the trading of debt is not Shari'ah compliant. A
way to meet the Islamic restrictions on debt
selling I believe would be to use Novation rather
than selling. Thus there would be a cancellation of the old
agreement and establishment of a new agreement between the parties.
The Novation could be included as part of the
contract note.
There is a also a problem in terms of the lack of Islamically compliant
short-term liquidity instruments. The Sukooks even if they were
traded and liquid are medium to long term. They are
thus not price stable. And the
current shortage of credit lines to Middle Eastern institutions has led to
an increase in short terms cash holdings but the lack of suitable
instruments creates a liquidity trap.
In terms of Asset / Liability Management there is a hedging problem for
institutions that lend long term at fixed yield through Ijaras and
finance through short term and therefore variable
yield accounts. There is thus a
pressing need for Islamic derivatives to address this gap problem. But
most derivatives are deemed to be Haram or not
Shari'ah compliant on the grounds of being gambling.
Perhaps "Financial Takaful (insurance)" would be a better
banner to address this problem and a number of institutions believe
they have much needed solutions to this problem.
Warren Edwardes interviewed by
Adrienne Roberts of the Financial Times for a feature on Islamic
Banking
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