Central banks back move for more liquid Islamic money markets

A number of central banks have given their backing to a new corporation set-up by the Islamic Financial Services Board (IFSB) to promote better liquidity management by firms involved in markets for Shari`ah-compliant products.

Officials from a number of member central banks of the IFSB signed a memorandum of participation to establish the International Islamic Liquidity Management Corporation, established to encourage more efficient and effective liquidity management in the market for Islamic financial services. Six multilateral organisations are also supporting the initiative.

The IFSB said the establishment of the corporation represented "a major breakthrough in the Islamic financial industry".

The corporation will provide more liquidity to the market for Islamic finance products both by issuing Shari'ah-compliant financial instruments and by facilitating greater investment flows of Shari`ah-compliant instruments across borders. The IFSB said the provision of liquid short-term Shari`ah-compliant instruments would "further promote the competitiveness and resilience of institutions offering Islamic financial services globally."

Attempts to develop more liquid Islamic finance markets have in the past met with only limited success due to a lack of availability of suitable Shari`ah-compliant instruments and the weaknesses in the supporting infrastructure. The IFSB said in a report released in March 2008 that the reliance on interbank arrangements with institutions offering only Islamic finance services implied interbank money markets were likely to be segmented between Islamic and conventional banks and not well integrated into the overall money markets in most jurisdictions.

The IFSB has been looking to address the problems caused by the lack of adequate Shari'ah-compliant instruments for liquidity management since 2005 when its members and technical committee mandated the IFSB Secretariat to propose ways to address impediments to the development of efficient Islamic money markets.

The IFSB plans to launch the International Islamic Liquidity Management Corporation on 25 October in Kuala Lumpur, Malaysia. The memorandum was signed at the IMF/ World Bank autumn meetings, held in Washington D.C. earlier this month.