A new global Islamic liquidity management corporation backed by central banks will start issuing Islamic bonds next year to help Islamic banks manage their liquidity, a board member said on Tuesday.
Liquidity management is seen as the weak point of the emerging Islamic finance industry as it currently relies on the use of commodity murabaha, a money market instrument only grudgingly accepted by Islamic scholars for lack of alternatives.
The Islamic capital market is in its infancy and there is a dearth of highly rated Islamic bond issues, or sukuk, which Islamic banks can use to place their surplus liquidity.
The Islamic Financial Services Board (IFSB), an association of regulators in Muslim countries, said in October it would set up the International Islamic Liquidity Management Corporation to issue sharia compliant instruments.
Khaled Al Aboodi, chief executive of the private sector unit of the Islamic Development Bank (IDB) and a board member of the new company, said it would start operations at the beginning of next year and could issue the first Islamic bonds, or sukuk, by the middle of 2011.
He said that while the sukuk will be issued by the company itself, individual central banks will act as custodian for the assets that underpin the sukuk.
"You move the asset to the central bank because that will raise confidence of the buyers of the sukuk," he said, adding that this would help the issues to obtain top credit ratings that qualify them to be used in banks’ liquidity management.
Islamic bonds need to be underpinned by physical assets from which returns to bondholders are derived.
The liquidity management company will be backed by 11 central banks, including Malaysia, Iran and Turkey and some Gulf states and is expected to have up to $1 billion in authorised capital.
