steps in creating global islamic money markets: why is it important to mediterranean countries
DESCRIPTION
Conference given during the first Arabic Finances Summit in Barcelona, part of the Mediterranean Week of Economic Leaders that took place on November 21st 2013. Issam Al Tawari Chairman & Managing Director Rasameel Structured Finance in Kuwait, is the author.TRANSCRIPT
“Steps in Creating Global Islamic Money Markets:
Why is it Important to Mediterranean Countries”
Issam Al Tawari Chairman & Managing Director Rasameel Structured Finance , Kuwait
VII MEDITERRANEAN WEEK OF ECONOMIC LEADERS: First Islamic Finance Summit November 21st , 2013
Vision – Global Islamic Money Markets
Efficient Global Islamic money markets are must for a well-oiled banking and financial services machinery
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Presence of a robust market system • Ensures efficient utilization of short-
term savings • Provides market for short-term
financing and securities • Allows mobilization of large sum of
funds between surplus and deficit participants through monetary policies
• Provides large number of options in terms of instruments to invest into
• Allows participants to manage risks more efficiently and protect investors from market volatility
• Mitigates the volatility of working capital needs
• Establish debt market pricing curve • Acts as a benchmark for pricing
derivatives • Boost investors’ confidence
• Helps in making banking system more robust through efficient liquidity management mechanisms
• Money market cross border integration reduces transaction costs and produces environment with competitive yields
• Matches short-term assets and liabilities (Islamic financial institutions, due to their inherent nature, face huge asset liability mismatch risk)
• Allows investors to invest into different asset classes through large number of instruments with varieties of terms
• Central banks may play a major role in implementing monetary policy through a well developed and strongly integrated money market.
• Markets allow central banks to do open market operations, government issuances, manage liquidity and set pricing targets
Gap Analysis
Conventional markets offer a scope of products that do not form part of Islamic finance ecology
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Collateralized Instruments
• Collateralized short-term Islamic financing market significantly lags behind uncollateralized short-term financing market
• Secured financing is more prevalent in most developed conventional money markets. Key instruments in these markets are:
Repo Market Asset backed securities market (ABCP) FX swap market
Futures (forward rate agreements) • Collateralized instruments present better chance for Islamic money markets to achieve
Shariah compliance Required effectiveness
Non-collateralized Instruments
• Most developed markets offer a broad array of both secured and unsecured financial instruments • Some of the key unsecured instruments that are yet to be inducted into Islamic money markets are:
Commercial Papers Certificate of Deposits (CDs) Bankers’ Acceptance (BA) Municipal & Government Loans Treasury Bills
The Way Forward
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Product Innovation
• To address these concerns, foremost focus should be to develop new products that may include securitization products like Asset backed securities, Repos, Forward contracts, FX swap, etc
• In order to make markets more versatile, both collateralized and unsecured financing instruments need to be developed,
• The objective should be to introduce more products that are universally accepted under Shariah law and thus increasing the scope of money market instruments
Standardisation Regulatory Framework
Market Infrastructure
• Standardization is a key element in the progress of Islamic finance
• It ensures universal acceptance and usage of a product
• Bodies like IIFM & ISDA have been playing a vital role here facilitating unification, Shariah harmonization and legal reforms in Islamic financial markets and products
• Lowers transaction costs
• Regulators play a pivotal role in Encouraging
standardisation of structures and documentation
Enhancing the system by ensuring compliance by the participants.
• Regulators may also help in
creating awareness among market players to encourage participation
• They may also help in human talent management by conducting courses in Shariah principles, legal and management aspects
• Impetus should also be on building the necessary infrastructure to ensure smooth market operations and creation of secondary markets..
• This facilitates efficient capital and trade flows
Islamic Capital Market
Substantial growth in number of financial centres and new Islamic financial
institutions specially from the Arabian Gulf (Bahrain & Dubai) area , SE Asia
(Malaysia & Singapore) and London are growing in importance.
WHY?
1. Increasing market penetration and a larger middle income group savings.
2. Reflecting on increasing market acceptance to the practice and increasing
sophistication of Islamic banking with new innovations and products.
Why……..
Additional source of funding
Take advantage of price difference
Increasing the reach and distribution o new investors
Establish issuers presence in Islamic DCM
Strictly Confidential 6
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Thank You