TOWARDS THE DEVELOPMENT OF SHARĪ‘AH COMPLIANT HIGH QUALITY LIQUID ASSETS FOR ISLAMIC FINANCIAL INSTITUTIONS

Abstract

Islamic banks are required to be able to access and hold sufficient
levels of High Quality Liquid Assets (HQLA) as part of Basel III
requirements. Such HQLA are specifically meant to allow the
Islamic banks to raise funds in money markets in the event of
liquidity shortage or in some cases for the funding of new profitable
investments. Against this backdrop, this study examines existing
efforts in developing Sharī’ah-compliant HQLA and the challenges
Islamic financial institutions are facing in assessing such liquid
instruments. Beside the laudable efforts of a policy-driven
supranational institution in developing Sharī’ah-compliant HQLA,
there has not been much effort in the global Islamic finance industry
to develop more HQLAs. As a matter of fact, it is the overarching
dearth of such Sharī’ah compliant HQLA for liquidity management
that led the Bank of England to commence work on the feasibility of
introducing central bank liquidity facilities such as the proposed
Sharī’ah compliant fund based deposit in 2015 which is expected to
be ready for implementation by Spring 2018. This study also finds
that experts have considered the potential of gold as HQLA for
bank’s liquidity management.