IslamicFinance.de

Matt Smith explores how sharia-compliant repo-like structures can support liquidity management in Islamic financial markets, and considers the structural, regulatory, and legal factors that need to be addressed. Islamic finance is steadily increasing its use of sharia-compliant alternatives to repos, helping the industry better manage liquidity and enabling sukuk holders to increase returns. Central banks use repos to control money supply, while commercial banks use them to manage short-term fluctuations in their cash holdings. Such structures effectively involve paying interest and so are forbidden under Islamic law. Enabling the widespread use of repo-like structures would help expand the secondary sukuk market, which is typically dominated by buy-and-hold investors. Yet asset growth among Islamic banks has slowed, while liquidity is increasingly scarce.