The Bangko Sentral ng Pilipinas (BSP) has drafted the guidelines for the liquidity risk management of Islamic banks and Islamic banking units (IBUs) that are specific to these banks’ operations.

Primarily, the BSP expects IBUs which are units or part of a conventional bank to have separate liquidity management arrangements and its assets and liabilities are segregated from its conventional parent bank. The key difference between an Islamic bank and a conventional bank is that depositors are “investors rather than lenders” in the former and they are just lenders in the latter.

In applying liquidity risk management, the BSP wants Islamic banks and IBUs to apply Shari’ah-compliant instruments and to not assume that these are identical to those of conventional banks. Shari'ah, which defines a set of rules and the lslamic financial system, refers to the practical divine law deduced from its legitimate sources such as the Qur'an, Sunnah, consensus of Muslim scholars, analogical sources of lslamic law.

The BSP cites as example sukuk held as liquid assets which “may be less liquid than conventional bonds held for the same purpose” and “similarly, where the management of liquidity risk involves the possibility of raising funds in the money market, the behaviour of the Islamic money market should not be assumed to be identical to that of the conventional market.”

The BSP also said that these banks should always consult their Shari’ah Advisory Council (SAC) in their funding strategy and a contingency funding plan. “Any instrument to be used in liquidity management should be acceptable to the SAC and is appropriate to the context in which it is to be used,” the BSP said in its proposed circular.

It is also proposed that Islamic banks and IBUs assess the liquidity risk of Shariah-compliant financing and to consider Shari’ah limitations on “the ways in which liquidity can be transferred between entities in a banking group, or between the IBUs and the bank proper, including the instruments that can be used for this purpose.”

An IBU however, in applying liquidity standards and the liquidity coverage ratio (LCR) need not have a separate one as part of a report, unless Islamic banking is a major part or activity of the bank. “Islamic banking is considered a ‘significant activity’ of the bank if the aggregate liabilities of the IBU represents at least

five percent of the bank’s total liabilities as of measurement date,” the BSP said in a footnote.

If the SAC of a bank has approved of instruments to be used in liquidity management, nn IBU also need not submit a separate net stable funding ratio report.

Since the availability of liquidity management instruments “which are appropriate for Islamic banks and IBUs (are) very limited” the BSP is allowing an observation period from the effectivity of the circular until December 31, 2024, and for LCR and NSFR, from Janaury 1, 2025 and thereafter.

“The observation period will provide ample time for the Islamic banks and IBUs to strategize on their liquidity risk management system including choice of liquidity tools to mitigate the risks arising from their business activities. Likewise, this will be an opportune time for the Islamic interbank and money market system as well as the secondary markets for Islamic funds/products to develop and gain traction as the market players gradually meet the set regulatory standards,” said the BSP.

It added, “as the domestic Islamic banking market is still in its early stage of development, the BSP shall adopt a flexible approach on regulatory compliance. It shall engage and be responsive to the market players and new entrants to the Islamic banking system in implementing the minimum LCR and NSFR requirements.”

The BSP said earlier that one of the challenges of developing Islamic banking in the country is that there are not enough Shari’ah scholars or Islamic finance experts.

Before the pandemic happened in February this year, the BSP has at least three conventional banks that are exploring setting up an Islamic bank.