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The inadequate availability of Sharia'a-compliant financial instruments is a challenge for the GCC Islamic banking industry, leading to excess liquidity and an uneven playing field for Islamic banks that might affect their growth, according to the International Monetary Fund (IMF).
An IMF working paper released on Monday said liquidity management has been a long-standing concern in the Islamic finance industry as there is a general lack of Sharia'a-compliant instruments that can serve as high-quality short-term liquid assets.
'The inadequate availability of Sharia'a-compliant financial instruments seems to have forced Islamic banks to hold a significant amount of cash reserves, limiting the flexibility of the central bank's monetary operations with Islamic financial institutions. Therefore, a key challenge is to broaden the range of Sharia'a-compliant instruments and build liquid markets', the report said.
It said a partial response would be to support efforts to build Islamic liquid interbank and money markets, which are crucial for monetary policy transmission through the Islamic financial system. 'This can be achieved, to a large extent, by deepening Islamic government securities and developing Sharia'a-compliant money market instruments'.
According to the IMF, Sharia'a-compliant assets represent a significant portion of total banking assets of the GCC. It said that, in the GCC, the market share of Islamic banking has crossed the 25 per cent threshold, which suggests that Islamic banks have become systemically important in these countries.