1. Treasury Management in an Islamic Financial Institution Mohammed Tariq Treasurer Islamic Development Bank 14 April, 2009

2. Role of Treasury in an Islamic Financial Institution Management of the liquidity Resource mobilization needs Hedging

3. Management of the liquidity What is liquidity?  Availability of funds as and when required.  Hold cash and securities which can be liquefied at short notice.  Securities or instruments should be such which have a minimal negative impact on the sale of such securities, hence, minimum price risk.  Ability to deal in reasonable size or quantity.

4. Management of the liquidity Instruments for Management of Liquidity o Conventional Finance: Interbank market o Islamic Finance: Placement of funds under Commodity Murabaha o Details of the Commodity Murabaha transaction. o Lack of liquidity in such placements. o Reciprocal arrangements through reverse Murabaha. o Credit risks similar to conventional,: lines to be setup between counter parties. o

5. Management of the liquidity o Islamic institutions can deal with conventional banks. o Other instruments like Sukuk: problems of longer duration, price risk, lack of liquidity, etc. o Sukuk holdings to be held as part of investment portfolio of the Treasury to earn higher returns.

6. Management of the liquidity  Asset Liability Management (ALM) o In order to meet disbursement requirements of the institution, placement of funds should ideally match the liability profile. o Techniques used for matching assets and liability by size as well as maturity. o Need to have active lines with other financial institutions to raise short-term funds as and when needed. o Risks involved, if liabilities are much higher than assets: impact of higher or lower interest rates in future, credit risks etc.

7. Management of the liquidity  Role of the Regulators/Central banks o Lender of last resort role o Lack of Shairha compatible financial instruments to intervene in the market for Islamic institutions. o Treasury bills or other such high quality instruments are not acceptable under Shairah law.

8. Resource Mobilization needs  Central to Treasury functions in an Islamic institution o Close involvement of the Treasury with the operational units of the bank to assess short and medium-term business plans and resource needs. o Clear assessment of the cost of funds for different periods to be provided to the business units in order for pricing such products.

9. Resource Mobilization needs  Instruments for Resource Mobilization o Short-term: Reverse Murabaha upto 1 year, mostly upto 3 months, Price risk. o Long-term: o Sukuk, asset backed (over 51% assets, rest debts) o Availability of acceptable assets o Rollover Commodity Murabaha, upto 3 years, issues of fixed vs. floating rate o Asset backed Sukuk tradable, others not so

10. Hedging  Profit rate and currency swaps for managing treasury risks o For profit rate swap: fixed vs. floating and vice versa o Currency swap