Islamic finance board aims to set liquidity standards

The Islamic Financial Services Board plans to draw up guidelines to help sharia banks manage liquidity risks, its secretary-general said, as the industry looks to beef up regulation after the financial crisis.

No major Islamic banks have collapsed as a result of the financial crisis. But sharia banking has been hit by sukuk defaults, a slump in Dubai real estate and a major debt restructuring.

Still, the credit crunch has prompted Islamic finance to review its liquidity management, a task which is often complicated by a lack of sharia money market instruments.

The board is an umbrella group for Islamic financial regulators.

Secretary-General Rifaat Ahmed Abdel Karim said it will ask its council's approval this month to draft liquidity risk standards, which he described as an urgent matter.

"Islamic financial institutions don't have adequate tools to manage their liquidity," Abdel Karim told Reuters in an interview.

"The majority of them tend to pile on cash because they cannot invest in short-term instruments. That seems to have put a strain on them."

Liquidity matters are handled by respective regulators in Islamic banking jurisdictions. Even if the board pulls together a set of standards, compliance will be voluntary.

Islamic banks worldwide are subject to varying levels of supervision, resulting in a fragmented global regulatory framework for the $1 trillion sector.

Sharia banking's biggest crises to date have related to the slump in Dubai real estate prices and a debt restructuring by Saudi firms Saad and Ahmad Hamad Algosaibi.

Some bankers have said total writedowns from the restructuring could amount to $22 billion.

Abdel Karim said the board would "start by looking at what the Basel committee has issued, what is the experience of the various members and then we (can) come up with something that would be shared by the rest."

The standards would have to take into account differing regulations in the jurisdictions, for example treatment of holders of investment accounts, which Islamic banks operate instead of interest-bearing accounts.

"Certain jurisdictions treat that as deposits and they will not allow the banks to pass the losses (to account holders) although they are investors," Abdel Karim said.

"To what extent can you pass to them the risk of loss arising from liquidity risks?"