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Championing Islamic finance in the UK and Malaysia

London, UNITED KINGDOM — Prime Minister Datuk Seri Najib Razak’s whistle-stop meeting with his British counterpart Theresa May at 10 Downing Street last Thursday when they vowed to strengthen business, trade and investment ties among others, comes at a time when the two countries are seeking to consolidate their cooperation in a post-Brexit Britain, including in the Islamic finance and investment space.

Najib touched down in London effectively for a day en route to Kuala Lumpur following his meeting with United States President Donald Trump at the White House on Tuesday. In London, Najib and May reaffirmed the strong ties between the two countries, which commemorated 60 years of diplomatic ties since independence on Aug 31, 1957.

Putrajaya is rightly targeting a post-Brexit British scenario. “I assured Prime Minister May that Malaysia is happy to discuss setting up a trade arrangement between our two countries as soon as possible. We know that trade between our countries will benefit our economies and our peoples. Malaysia stands ready, is well poised and can add value proposition to whatever plans the United Kingdom might have post-Brexit,” he stressed after the meeting.

Malaysia and Britain have been forging close cooperation in the field of Islamic finance, which resulted in the establishment of the UK-Malaysia Islamic Finance Forum by Bank Negara Malaysia and TheCityUK, a financial services professional body that champions UK-based financial and related professional services.

A significant development is the Bank of England’s (BoE) announcement on Friday that it has begun to implement a Wakalah or agency fund-based model, albeit slightly modified for the UK legal and regulatory environment.

The alternative would have been a commodity Murabaha or Tawarruq structure prevalent in markets including Malaysia, which has the most comprehensive universe of local currency Islamic liquidity management tools for Islamic financial institutions authorised by BNM. Malaysian Islamic banks, like counterparts elsewhere, however, continue to yearn for more such instruments in international currencies — US dollar, sterling, euro and yen.

The BoE facility would provide Islamic banks in the UK and any UK banks, which cannot engage in interest-based activity, with greater flexibility in meeting Basel III liquidity requirements. Hitherto, BoE’s Sterling Monetary Framework (SMF) is the mechanism by which the bank sets interest rates, and interest-based facilities are, of course, not syariah-compliant.

The UK Treasury and BoE have been keen to close liquidity management gaps by creating a level playing field for the six Islamic banks authorised in the UK and the 26 Islamic Windows offering such products. Islamic banks have been at a disadvantage in this respect.

The market impact could be far-reaching, especially for non-Muslim jurisdictions seeking to facilitate or introduce Islamic banking. Many developed and emerging markets keenly follow UK regulatory, legal, policy and other developments relating to Islamic finance.

As such, the UK Model of Islamic Finance is seen as the one to emulate, which in turn has drawn much from the Malaysian Model of Islamic Finance — the two jurisdictions share a common law legal system which, complete with Fiqh Al Muamalat or Islamic Law relating To Financial Transactions, is the basis of most international Islamic finance transactions, including sukuk, which has English law as the governing law.

In this respect, the BoE’s Islamic liquidity facility could very well complement the UK’s Brexit objectives of sustaining the city’s importance as the global financial hub.

I can reveal that BoE is aiming for the Wakalah liquidity facility to go fully live by spring or summer next year. BoE, according to sources, has deliberately chosen a model that won’t require parliamentary approvals or primary legislation, as that would otherwise push the timeline back even more. Even so, there is a lot to do to sort out the legal analysis and documentation, and make the necessary changes to the bank’s rather complicated information technology systems.

Among other things, according to BoE, “this involves work to integrate the facility into the bank’s existing internal systems and processes, and create a set of standardised terms and contractual documentation, similar to those used by participants of the bank’s existing SMF. The documentation will include details on the term of deposits and frequency of access”.

The Wakalah facility, in some respects, has a global financial inclusion element. While the facility is structured to be acceptable for use by UK Islamic banks, consistent with Basel III and EU liquidity rules, it, BoE stresses, “will also be available to any other banks which are prevented from engaging in interest?-bearing activity in their articles of association or incorporation. This will mean that commercial banks in the UK will be able to access either the bank’s conventional SMF facilities, or the SCF — but not both”.

According to the International Monetary Fund (IMF), there are currently six key syariah-compliant liquidity management instruments offered by central banks for the Islamic banks in their jurisdiction. These include interbank mudarabah placements; commodity murabahah, central bank wadiah or trust certificate/deposit; central bank papers such as musharakah certificates and sukuk; other freely tradable government paper akin to domestic government securities; and Islamic repurchase agreements or sale and buyback.

Many of the 57 Organisation of Islamic Cooperation markets do not have such facilities in place, which slows the development of Islamic banking in their jurisdictions.

Perhaps they should emulate BoE’s approach: “We’re doing our best; we’re trying to do it quickly; but doing it right is imperative.”

Source: The New Straits Times