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Wednesday, 25 November 2009

Strong liquidity management is vital for the development of Islamic finance

KUALA LUMPUR: Enhancing the ability of Islamic financial institutions to manage liquidity is important for the development of a stronger and more resilient Islamic financial industry, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

“The recent financial turmoil in advanced economies has clearly demonstrated the consequences of liquidity constraints and underscored the importance of a strong and well-developed liquidity management infrastructure,” she said yesterday at the Bank Negara High Level Conference on Financial Stability.

She said facilitating effective cross-border management of liquidity required the development of syariah-compliant financial instruments and a well-developed international market infrastructure so that liquidity risks were effectively managed.

“For that, the Islamic Financial Services Board (IFSB) and the Islamic Development Bank (IDB) established a liquidity management task force early this year to develop a liquidity management framework,” she said, adding that they hoped to have the framework in place next year

She added that IFSB, which was established in 2002, had been instrumental in developing and issuing global prudential standards and guiding principles for the industry.

“Apart from the implementation of these prudential standards, there is also a need to ensure the supervisory and legal infrastructure remains relevant to the rapidly changing Islamic finance landscape,” she said.

Zeti said in Malaysia, these efforts were also supported by a comprehensive financial safety net that included a deposit insurance scheme and a resolution mechanism, so that not only were the depositors protected, but also allowed for prompt, effective and least-cost resolution of the financial system.

The system she said, could facilitate recapitalisation of Islamic financial institutions as well as institute programme to remove troubled assets from the books of financial institutions.

“The development of Islamic finance in Malaysia that operates in parallel with conventional finance for almost three decades now has demonstrated its sustainability as a form of financial intermediation,” she said.

Today, she said the Islamic banking system had emerged as a vibrant financial system with Islamic banking assets currently accounting for 18.8% of the total banking assets of the Malaysian financial system.

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