Moody 's : retail and government instruments to support the liquidity of Islamic banks in Asia and the Gulf

2016/09/15 | 16:22

(Encyclopedia of the Day News | Iraq News ) - straightforward: the credit rating institution , "Moody , " said in a report Thursday, the liquidity strength of Islamic banks in Asia and the Gulf Cooperation Council , led by retail quality and availability of instruments from the government side.

It noted the report, to cover the liquidity of Islamic banks in those countries ratios show the possibilities of sound liquidity and compliance of a broad regulatory requirements for "Basel 3".

The report highlighted the main driver for the performance of liquidity to those banks and proportions of funding to cover, to refer to over-reliance on corporate deposits and wholesale funding is secured, which means more potential pressure on liquidity, in spite of that, these banks have a larger proportion of retail deposits .

The report, to restrict retail financing for Islamic banks in Asia, specifically with small branch network, led by poor liquidity coverage ratios, compared with their conventional counterparts.

The report added that, in the Gulf states, Islamic retail customers tend to be more sensitive to the provisions of Islamic law, and with the availability of Islamic banks and the presence of a large base of low-cost deposits, the strongest support for them and cover the liquidity as well.

Compared with conventional banks report pointed out that Islamic banks face a shortage evident in high-quality, compatible with Sharia liquid assets, including a challenge to the continued profitability of Islamic banks in most GCC countries compared with the situation of their counterparts in Malaysia, Indonesia and Qatar.

The report also pointed out that the drop in oil prices and the reduction of overall liquidity in the Gulf Cooperation Council (GCC), resulting in higher levels of funding in the market, a development that could lead to a weakening cover the liquidity of both the Islamic and conventional banks ratios.

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Announcement: Moody's: Islamic banks' strong liquidity profiles driven by retail strengths and government sukuk availability
Global Credit Research - 15 Sep 2016

Singapore, September 15, 2016 -- Moody's Investors Service says that the liquidity coverage ratios (LCRs) of Islamic banks in key Asian and Gulf Cooperation Council (GCC) countries highlight sound liquidity profiles and broad compliance with Basel III regulatory requirements.

"In the report, we highlight that a key driver of LCR performance is the funding profile of banks and, in this context, over-reliance on corporate deposits and unsecured wholesale funding means higher potential liquidity pressures," says Simon Chen, a Moody's Vice President and Senior Analyst.

"However, banks with a greater proportion of retail deposits that are considered more 'sticky', typically display stronger LCRs," adds Chen.

In Asia, the retail funding of Islamic banks is constrained by their small branch networks, which results in weaker LCRs when compared to their conventional peers.

By comparison, in GCC countries, Islamic retail customers tend to be more Shariah sensitive, providing Islamic banks with a large base of low-cost retail savings deposits, hence supporting their stronger LCRs.

Moody's conclusions were contained in its just-released report on Islamic banks in Asia and GCC countries, "Islamic Banks: Strong Liquidity Profiles driven by Retail Focus but Deeper Sukuk Markets needed". The report was authored by Chen and Khalid Howladar, Moody's Global Head of Islamic Finance.

"When compared with conventional peers, Islamic banks in some jurisdictions clearly face a shortage of Shariah-compliant high-quality liquid assets (HQLAs), putting them at a disadvantage," says Howladar.

"In particular, the limited availability of HQLAs means large, low-yielding buffers of cash or bills are commonly held, posing a persistent profitability challenge for Islamic banks in most GCC countries when compared with the situation for their counterparts in Malaysia, Indonesia and Qatar -- a GCC member -- where the sovereigns are supportive of the industry through frequent issuance of sukuk," adds Howladar.

At the same time, lower oil prices are reducing overall liquidity in GCC countries, pushing up market funding levels; a development that could lead to a weakening of LCR metrics for both Islamic and conventional banks.

The report is being released in conjunction with a Moody's conference on Islamic finance in Kuala Lumpur on September 20. More details can be found below.

Looking ahead, liquidity for Islamic banks will continue to benefit from the expansion of their retail businesses, while the development of domestic sukuk markets will improve their access to HQLAs, further bolstering their LCRs.


https://www.moodys.com/research/Moodys-Islamic-banks-strong-liquidity-profiles-driven-by-retail-strengths--PR_355116