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Moody's Investors Service says that the liquidity coverage ratios of Islamic banks in key Asian and 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.