2. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes, ceo, Delphi Risk Management Limited e: we@dc3.co.uk w: dc3.co.uk

3. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes They have been looking for this A weapon of Maths Instruction

4. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Delphi’s website contains: articles on Islamic banking on: dc3.co.uk/islamicbanking The full speech will be on: dc3.co.uk/islamicliquidity031008.pdf with PowerPoint on dc3.co.uk/islamicliquidity031008.ppt

5. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes thoughts on liquidity More than listing Is there a buyer when you are a seller? More than negotiable At what price?

6. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes thoughts on liquidity British Gas Falklands War Dumping of Aaa A1-P1+CP Don’t hold paper in the news

7. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes thoughts on liquidity Midland Bank Crocker bank led to dumping of Midland CDs Don’t hold paper in the news

8. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes thoughts on liquidity Continental Illinois Plenty of “liquid” assets No diversification of liabilities mainly wholesale and few retail customers

9. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes thoughts on liquidity Access to determinate amount of cash When you need it Preservation of capital on demand Free from price risk Undoubted quality low credit risk and be seen to be so Need a quality overnight instrument with stable capital values

10. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Background to Islamic liquidity MEED quotation Written in December 1997

11. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Background to Islamic liquidity Asset/liability gap management Shortage of instruments LMC /IIFM initiatives –Malaysia, Bahrain & IDB Sukuks Liquidity and price transparency is required for an active secondary market Issues oversubscribed but minimal trading This lack of liquidity paradoxically increases the demand for liquidity

12. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes liquidity management Investments long dated – deposits are short –massive gap –Massive liquidity problem Need flexibility with Shari’ah compliance Sukuks held to maturity Short selling? Stock borrowing?

13. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes liquidity management LME Murabaha is main destination –Bilateral transactions –Counterparty limits Some funds exist –But not capable of market size transactions Segmentation inevitable Co-operation needed with a market level solution

14. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes No Inter-bank market Balance sheet management problem Cannot easily finance when there are withdrawals So more liquidity than needed by a conventional bank Bilateral Murabaha with break clauses is widespread liquidity vehicles cannot withstand a $100 injection or withdrawal

15. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Conclusion & summary Sukuks bought to hold –minimal secondary market for on sale –Mark to market and price determination is difficult Shortage of paper Is debt trading really Hallal? Novation agreements –Cancellation of original purchase and replacement with new owner in contract note

16. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Conclusion & summary Asset / Liability problem –Long term asset fixed and short term variable deposits No derivatives – yet! –Financial Takaful?

17. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes Conclusion & summary Lack of short term instruments Sukuks are medium plus term Not price stable or really liquid Shortage of credit lines Wanted a market-sized, liquid, inter- bank market solution where institutions can park their reserves

18. Islamic Liquidity Islamic Funds World conference, London 7-8 October 2003 Warren Edwardes They have been looking for this A weapon of Maths Instruction