MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Managing Liquidity: Islamic Treasury Products

The Islamic finance market is said to be growing at about 15% to 20% annually and the total assets stand at US$1 trillion (RM3.69 trillion) in 2006. Accordingly, there is a massive amount of liquidity but a limited number of products to mobilize these excess funds. In Malaysia, the average daily surplus is said to be between US$544.17 million (RM2 billion) and US$816.25 (RM3 billion) and in 2006, the total number of outstanding Islamic commercial papers is US$507.2 billion (RM138 billion).

Acknowledging the fact that the Malaysian Islamic money market has developed very well, Ijlal Alvi however said that such development should not merely reflect a change of labeling from the conventional model but, more importantly, it should be a dedicated, developed model. Such a model, he added, would be the benchmark for others to follow.

The key driver to product innovation was basically demand, explained Arul Kandasamy, who strongly believed that practitioners needed to educate their customers on innovative products and solutions.

Using Telekom Malaysia as an example, Arul said that the company could have securitized its rental payment from millions of telephone lines and issued a 30-day commercial paper. Similarly, he added, AirAsia could use Musharakah to pre-sell the seats and as they were filled up, it could then redeem the commercial paper issued.

“Players must be creative and not lazy,” he urged, noting that Islamic banks must get involved, as many innovative products were presently being structured by conventional banks such as Calyon or HSBC. Arul also stressed that the emphasis in product development should be very much on the process and how it worked, not on the structure.

He noted that in conventional structures, any institution that signed up an International Swap and Derivatives Association (ISDA) agreement would also be regulated in other related activities. Unfortunately, he added, there was no equivalent in Islamic finance yet, although ISDA had been working on a Shariah compliant ISDA for the past three years.

In the context of today’s banking environment, he said that although the spirit was supposedly for a trustee–investor relationship, in reality banks were intermediaries who could never avoid risk management with derivatives as the tool.

Derivatives should not be stamped as bad, as the instruments were not purely for speculation, but could also be used for hedging in risk management. Arul urged Shariah scholars to create certain acceptable parameters under which risk management mechanisms could be used.

Dr Malik Al-Awan stressed that the Shariah played an important role in building the competitive advantage in Islamic finance. However, he admitted that a lot of Shariah training was rooted in the 8th century schools of thought. According to Malik, most of the contracts reflected 8th century terminology and the challenge in training the scholars was how to bring the current practice to the real spirit of Shariah.

“The spirit of Shariah is to build a society on fairness, equity and social justice,” he explained, pointing out that Malaysia had two choices in developing the Islamic finance industry: either developing it based on conversion from the conventional practice; or developing it solely based on the true spirit of Islamic finance.

Interestingly, he noted that the governor of Bank Negara Malaysia had said that Malaysia had started to move towards developing the industry based on the true spirit of Islamic finance and, once this was achieved, players from other parts of the world would follow.

Referring back to the opening remarks of moderator Muhammad Ibrahim on excess liquidity, Malik said that this situation was contrary to the spirit of Islamic finance,
whereby Islam encouraged the deployment of cash, rather than leaving it idle.

Touching on the need for hedging tools, Abdulkader Thomas said that hedging was coming to the fore due to the maturing market and not solely due to the surge of petrodollar. Ijlal supported this, saying that hedging should be purely for risk management purposes, and not speculation.

Moving forward, Ijlal said Malaysia, despite being at the forefront of Islamic finance, should also be involved with other jurisdictions and should share its knowledge with the rest of the world.

Malik, on the hand, said that Malaysia held its current position not merely because of Islamic finance, but also because of its strong manufacturing leadership. Leveraging on this strength, Malaysia should also focus on the development of Small and Medium Enterprises (SMEs), in line with the spirit of Islamic finance for the betterment of the community at large.