Economic, Markets and Personal finances :: World finance

Sukuk the missing link in bangladesh islamic finance sector


´╗┐Bangladesh has developed a sizeable Islamic finance industry but a lack of sharia-compliant instruments such as sukuk is limiting further growth of the sector, a report by a standard-setting body found. With a predominantly Muslim population of 160 million, Bangladesh has developed Islamic finance with only marginal regulatory adjustments; the industry has doubled in size in the past four years. The central bank has a small short-term sukuk (Islamic bond) programme which issues six-month tenors to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there are no corporate sukuk. Sukuk would help to diversify funding sources and make up for the limited scope of the Islamic money market, but issuance of sukuk would require more specific rules, said the report by the Malaysia-based Islamic Financial Services Board (IFSB)."The larger policy issue in Bangladesh is the adequacy and scope of the legal and regulatory framework in providing an appropriate enabling environment," it said.

Islamic banks, which follow religious principles such as a ban on interest payments, now represent 18.9 percent of total bank deposits in Bangladesh, the report said. Bank deposits, excluding interbank deposits, totalled 6.33 trillion taka ($82 billion) in March this year, according to the central bank. The banks include Islami Bank Bangladesh Limited (IBBL) , set up in 1983 as the country's first Islamic bank and its largest privately owned commmercial bank. But Islamic banks ran into liquidity constraints in 2010 when their combined advances-to-deposit ratio exceeded a ceiling set by the central bank, prompting the regulator to monitor their liquidity profiles to detect maturity mismatches.

This problem was addressed in 2011 when the central bank launched an Islamic interbank money market, but the dominant share of IBBL limits the market's efficiency, the report said."Its relative size may impact on the effectiveness of the interbank market, and the central bank should take a further look at this issue."The central bank has set statutory liquidity requirements for Islamic banks at half of what is required for conventional banks, boosting their profitability but leaving the core issue of the money market's depth unaddressed.

"This privilege has the critical flipside that the instruments of Islamic banks for their liquidity risk management are very limited. In cases of sizeable and unexpected deposit withdrawals, Islamic banks may face a liquidity crunch."The report also said a sharia-compliant lender-of-last- resort facility and Islamic deposit insurance should be developed by regulators. The central bank, which did not respond to Reuters queries about its Islamic finance strategy, has said it plans to expand its short-term sukuk programme."Introduction of another similar instrument of three-month tenor for further facilitation is at the final stage," central bank governor Atiur Rahman said in a speech in April. The central bank is also developing an Islamic refinancing mechanism to increase Islamic bank lending to small and medium-sized businesses, and will encourage greater use of risk-sharing modes of finance, Rahman said. ($1 = 77.4250 Bangladesh takas)

Trlpc markit acquires systems integration software from jpm for loan mark


´╗┐Feb 9 Markit, the financial data company, has acquired systems integration software from JP Morgan that will help to connect different loan processing programs and reduce the time it takes to close the sale of a syndicated loan. Regulators have criticized lengthy settlement times in the US$870bn loan market, concerned that the average 19.3 days it currently takes to close a loan trade may pose a problem for mutual funds if a large number of investors ask for their money back during a downturn. The software, known as middleware because it connects operating systems and applications, will integrate with the loan trade settlement platform Markit Clear and help with straight-through processing that eliminates manually inputting information, according to Markit. When two parties agree on a trade, they would enter the transaction information into their own loan accounting ledger systems. Using the systems integration software, the information would then be transferred to Markit Clear, where the trade is settled. By electronically connecting bank systems that track ownership with the settlement platform, trades can settle faster. It currently takes more than six times longer to complete a loan trade than a bond trade."This middleware is essentially at the core of the loan market ecosystem that will provide seamless integration among systems and straight-through-processing of loan servicing and settlement data," Scott Kostyra, head of loan settlement at Markit, said in an e-mail. "This efficiency gain is, in itself, important, but will also contribute to bringing down loan trade settlement times."

In a September proposal to improve liquidity risk management, the US Securities and Exchange Commission (SEC) said that long bank loan settlements may create a mismatch when funds try to return investor money. Mutual funds need to meet redemption requests in seven days, much faster than the average time it takes to complete a trade for a syndicated loan, a financing provided by a group of lenders. Open-end mutual funds, which allow for daily liquidity, are prevalent in 401k retirement plans and 529 plans for college savings. At the end of 2014, 53.2m households owned mutual funds, SEC Chair Mary Jo White said last year.

The loan trade group, the Loan Syndications and Trading Association (LSTA), recommends loan trades close in seven days. It takes three days to complete a bond trade. A number of parties are working on initiatives to improve loan settlement times, including developing a standard electronic messaging system for the asset class. The International Swaps and Derivatives Association may release the final version of Financial products Markup Language (FpML) for settlement information between a bank arranging a loan and its trade counterparties later this year, sources said. The systems integration software will help the market begin to use Markit Clear as well as FpML to communicate information to lenders using electronic messaging, according to Markit. Customers may begin using the software in the second half of 2016.

Financial terms of the acquisition were not disclosed. Separately, last month Markit announced it had agreed to acquire the position reconciliation technology assets of DTCC Loan/SERV, a unit of the Depository Trust & Clearing Corp (DTCC). Agent banks and lenders can post their commitment balances to the DTCC Loan/SERV reconciliation program to ensure their records match, which the DTCC says can reduce incorrect accrual amounts and reduce adjustments in cash positions that may need to be resolved after cash payments have been made."Along with our recent acquisition of the loan position reconciliation assets from DTCC, [this software acquisition] will significantly expedite the adoption of Markit Clear, FpML and other industry initiatives that have been in development," Kostyra said.