By Michelle James
The IFSB’s proposal on Sharia-compliant LOLR facilities could help boost the stability of the Islamic banking industry by minimizing banks’ exposure to liquidity risks, said S&P Global Ratings in its report published today.
Several core Islamic finance countries have not yet developed or formalized mechanisms to provide “last resort” support for Islamic banks. This disadvantages Islamic banks compared with their conventional peers from a customer confidence and rating perspective.
However, while the IFSB proposals could give Islamic banks an extra resource to meet liquidity needs in stress situations, we think that the proposed instruments would benefit from further refinement.
For example, collateralized murabaha or a combination of the instruments highlighted by the IFSB could be used as tools to implement SLOLR facilities.
In our report, we outline the positives and shortcomings of the proposals, and detail how these instruments could be employed by central banks of core Islamic finance countries.
Source: Salaam Gateway