SYDNEY, May 15 (Reuters) - The Kuala Lumpur-based Islamic Financial Services Board (IFSB) plans to issue a guidance note for Islamic banks on the adoption of liquidity standards, warning lenders lack high-quality assets to meet new regulatory requirements under Basel III.
The IFSB sets global guidelines for Islamic finance, although national financial regulators have the final say on their implementation and enforcement.
The Islamic body aims to issue the guidance note in 2014, having already issued a liquidity guideline in March of last year, according to an IFSB report released on Tuesday.
A separate guideline on capital adequacy, currently under revision, will be issued at the end of 2013.
The IFSB will focus on the liquidity coverage ratio of Basel III, which measures the amount of highly liquid assets held by banks that can help meet short term obligations.
While the industry is urged to develop instruments to meet Basel III criteria, the IFSB warned of potential problems when the standards are phased in over the next several years.
“Liquidity is an area where Islamic banks are likely to be impacted, principally due to the lack of liquid sharia-compliant instruments that can meet Basel III’s stringent requirements,” the report said.
According to the IFSB, such instruments would require an active and sizeable market, the presence of committed market makers, low market concentration and flight to quality.
To address this need the International Islamic Liquidity Management Corp (IILM) is preparing to issue sukuk, or Islamic bonds, in the second quarter of this year.
Currently, most countries have a shortage of sharia-compliant financial instruments that can be classified as “Level 1 assets” under Basel criteria, the report said. Sukuk issued in countries with a sovereign rating lower than AA- would be unable to meet the requirements for “Level 2 assets”.
New instruments would be welcome additions, but they could also lead to concentration risk to a limited set of products and place pressure on bank margins and financing rates in a period of rising borrowing costs, the report added.
The report also outlined the need for regulators to develop an Islamic lender of last resort as a safety net to promote stability in the Islamic finance industry. (Editing by Dinesh Nair)