Non-interest banks in Nigeria, need more instruments to improve liquidity under the Basel III requirements of the global banking system. Mr. Abdulwaheed Shitta, a banking and finance expert made this point while speaking on “Opportunities and Challenges of Islamic Banking and Treasury Management in Nigeria”.
According to him, the Basel III Accord was initiated by the Basel Committee on banking supervision to address the global financial crisis of 2007-2008 to strengthen the banking sector across the globe and emphasized capital, liquidity management of banks, and other segments in the financial market.
He said “Liquidity is the ability of financial inflation to balance inflows and outflows for the institution to be liquid. Liquidity risk can occur when there is a mismatch between liabilities and assets. The committee also developed two minimum standards to ensure the liquidity of banks within the short-term and NSFR(Net stable funding ratio) to ensure liquidity at the medium to long-term”.
Global financial analysts have concluded that the impact of Basel III on Islamic banks is relatively smaller compared to the conventional financial institutions, considering the model of non-interest banking that does not support non-Shariah-compliant securities or derivative products.
He said in Nigeria, one common short-term money market instrument is the treasury bills which is not shariah-compliant. This is a reason for limited liquidity for non-interest banks under Basel III.
He concluded that Islamic liquidity instruments in the financial markets were less effective and less liquid than conventional market assets.
Speaking further, Shitta described treasury management as the management of funds or revenue within a banking system. The treasury function of an Islamic finance institution is to manage depositors and shareholders’ funds.
Shitta in explaining Islamic financial products as it concerns treasury activities said that the treasury function of an Islamic bank, was the management of strategic and liquid reserves amongst other liabilities.
In respect of risk management, Shitta explained that risk management in finance was critical and should be addressed squarely as typical banking operations involve a variety of risks.
He said Hadith teaches that man should diversify assets and not put all his eggs in a basket. This is to adopt general measures against risk.
Islamic Financial instructions face performance risk due to their mode of operations such as equity investment risks- Musharaka and Mudarabah, Islamic banks may also face risks that emanate from Salam and Ijarah contracts.
Source: Proshare