Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Islamic Liquidity

• Islamic Funds World conference, London

• 7-8 October 2003• Warren Edwardes, ceo,

Delphi Risk Management Limited

• e: we@dc3.co.uk• w: dc3.co.uk

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

• They have been looking for this

• A weapon of Maths Instruction

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Delphi’s website contains:

• articles on Islamic banking on:dc3.co.uk/islamicbanking

• The full speech will be on: • dc3.co.uk/islamicliquidity031008.pdf• with PowerPoint on • dc3.co.uk/islamicliquidity031008.ppt

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

thoughts on liquidity

• More than listing• Is there a buyer when

you are a seller?• More than negotiable• At what price?

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

thoughts on liquidity

• British Gas• Falklands War• Dumping of Aaa A1-P1+CP• Don’t hold paper in the news

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

thoughts on liquidity

• Midland Bank• Crocker bank led to

dumping of Midland CDs• Don’t hold paper in the

news

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

thoughts on liquidity

• Continental Illinois• Plenty of “liquid” assets• No diversification of

liabilities• mainly wholesale and few

retail customers

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

thoughts on liquidity

• Access to determinate amount of cash

• When you need it

• Preservation of capital on demand

• Free from price risk

• Undoubted quality low credit risk and be seen to be so

• Need a quality overnight instrument with stable capital values

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Background to Islamic liquidity

• MEED quotation• Written in December 1997

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Background to Islamic liquidity

• Asset/liability gap management• Shortage of instruments• LMC /IIFM initiatives

– Malaysia, Bahrain & IDB Sukuks

• Liquidity and price transparency is required for an active secondary market

• Issues oversubscribed but minimal trading• This lack of liquidity paradoxically increases the

demand for liquidity

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

liquidity management

• Investments long dated – deposits are short– massive gap– Massive liquidity problem

• Need flexibility with Shari’ah compliance• Sukuks held to maturity• Short selling?• Stock borrowing?

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

liquidity management

• LME Murabaha is main destination– Bilateral transactions– Counterparty limits

• Some funds exist– But not capable of market size

transactions

• Segmentation inevitable• Co-operation needed with a market

level solution

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

No Inter-bank market

• Balance sheet management problem• Cannot easily finance when there are withdrawals• So more liquidity than needed by a conventional

bank• Bilateral Murabaha with break clauses is

widespread• liquidity vehicles cannot withstand a $100

injection or withdrawal

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Conclusion & summary

• Sukuks bought to hold– minimal secondary market for on sale– Mark to market and price determination is

difficult

• Shortage of paper• Is debt trading really Hallal?• Novation agreements

– Cancellation of original purchase and replacement with new owner in contract note

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Conclusion & summary

• Asset / Liability problem– Long term asset fixed and short term

variable deposits

• No derivatives – yet!– Financial Takaful?

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

Conclusion & summary

• Lack of short term instruments• Sukuks are medium plus term• Not price stable or really liquid• Shortage of credit lines• Wanted a market-sized, liquid, inter-

bank market solution where institutions can park their reserves

Warren Edwardes

Islamic LiquidityIslamic Funds World conference, London 7-8 October 2003

• They have been looking for this

• A weapon of Maths Instruction