Obtaining and Deploying Liquidity - Scope of the Standard

Transcription

1. Shari ’ah Standard No (44): Obtaining and Deploying Liquidity Statement of the Standard 1. Scope of the Standard This Standard covers what is meant by liquidity and the permissible means of obtaining and deploying it. 2. Definition of Liquidity and Liquidity Management 2/1 Liquidity refers to cash or that which can be easily converted to cash. 2/2 Liquidity management means achieving a balance between obtaining liquidity as swiftly and cheaply as possible and investing and deploying it effectively. Liquidity is achieved in various ways depending on where it is being utilised. For example, in institutions it is the ability to cover withdrawals; in the money market it is the ability to swiftly convert securities into cash; and with Sukuk and investment funds, it is the ability to redeem or sell them in the secondary market. 3. Need to Utilise Liquidity in Institutions Institutions need liquidity to meet numerous requirements, such as: 3/1 To distribute profits, which may rely on the liquidation of assets, see Shari’ah Standard No. (40) on Distribution of Profit in MudarabahBased Investment Accounts. 3/2 To discharge liabilities by selling inventory assets and converting them to cash to pay what is owed to creditors, to face contingent liabilities, or liquidate investment vehicles or the institution itself, and similarly to expand its activities, or to achieve capital adequacy or to improve its credit rating, see Shari’ah Standard No. (43) on Insolvency. 4. Obtaining and Deploying Liquidity 4/1 Obtaining and deploying liquidity through interest-bearing loans is prohibited by the Shari’ah, whether transacted directly or through 1088
2. Shari ’ah Standard No (44): Obtaining and Deploying Liquidity overdrafts or interest-bearing or commission-based facilities. Any liquidity support made available by supervisory or regulatory bodies (such as central banks) must be provided only through Shari’ahcompliant modes, such as Mudarabah and investment agency. 4/2 Permissible modes of obtaining liquidity include: 4/2/1 Selling commodities on a Salam (deferred delivery) basis, receiving payment up-front, and then purchasing the relevant commodities for delivery on the maturity date. It is permitted to secure a promise to sell (from a third party commodity broker) to mitigate the risk of fluctuation between the sale price and purchase price. [see Shari’ah Standard No. (10) on Salam and Parallel Salam] 4/2/2 Istisna’a concluding an Istisna’a-based sale contract stipulating advance payment -although advance payment is not obligatory- and concluding a parallel Istisna’a-based purchase contract stipulating deferred or installment payment. [see Shari’ah Standard No. (11) on Istisna’a and Parallel Istisna’a] 4/2/3 The institution selling some of its assets for immediate cash and then, if required, leasing the asset back on rent payable in arrears, taking into consideration what has been stated in Shari’ah Standard No. (9), item 5/8, on Ijarah and Ijarah Muntahiah Bittamleek. 4/2/4 Financing working capital to expand the institution’s activities This involves the institution inviting investors to participate in financing its working capital on a Mudarabah or Musharakah basis for a specified period of time determined by its liquidity requirements and with the ability to liquidate the Mudarabah or Musharakah at the end of such period. The investors enter into the Mudarabah or Musharakah by contributing their capital while the institution contributes its current assets, after valuation, as its share of the capital of the Musharakah or Mudarabah. The institution’s fixed assets do not form part of 1089
3. Shari ’ah Standard No (44): Obtaining and Deploying Liquidity the Musharakah; rather, fixed assets are either lent or leased to the venture and rental payments are accounted as expenses of the Mudarabah or Musharakah. 4/2/5 Issuing investment Sukuk to expand the institution’s activities This involves issuing the types of investment Sukuk explained in Shari’ah Standard No. (17) on Investment Sukuk in order to obtain funds from Sukuk investors and undertake projects required of the institution. The institution may securitise some of its assets by selling them to Sukuk subscribers, managing the assets on their behalf and promising to purchase them at the market price or at a price to be agreed. If the institution is only the lessee and not the manager of the Sukuk assets, it may promise to purchase them at face value. 4/2/6 Tawarruq This should be done in accordance with Shari’ah Standard No. (30) on Tawarruq. 4/2/7 Interest-free loan An application of interest-free loans is outlined in Shari’ah Standard No. (26) on Islamic Insurance in item 10/8 regarding loans given by the Takaful operator to the Takaful fund. 5. Liquidity Should Only Be Deployed Using Shari’ah-Compliant Modes, which include: 5/1 Purchasing commodities in cash and selling them for deferred payment through Musawamah or Murabahah contracts. 5/2 Leases, lease contracts that end in ownership and forward leases, whether for tangible assets or services. 5/3 Purchasing commodities on a Salam basis (immediate payment for deferred delivery), then selling them after taking physical or constructive delivery, whether personally or by appointing the seller, in a separate contract, to sell the commodities to his customers. 1090
4. Shari ’ah Standard No (44): Obtaining and Deploying Liquidity 5/4 Istisna’a and parallel Istisna’a, which involve the institution commissioning the manufacture of products or projects on an Istisna’a basis with immediate payment for deferred delivery upon completion and then selling the same manufactured products to a third party through a second Istisna’a contract for deferred price and delivery, without linking the two contracts, or procuring the sale by appointing the manufacturer as an agent, through a separate contract, to sell the manufactured product or project to his customers. 5/5 Musharakah and Mudarabah which involve the institution as the capital provider. 5/6 Investment agency, which involves the institution appointing another institution or those with whom it deals to act as its agents. 5/7 Subscription to purchase Shari’ah-compliant stocks, investment Sukuk or shares in investment funds. 5/8 International commodity trading in the financial markets in accordance with Shari’ah. 5/9 Currency trading in accordance with Shari’ah. 6. Date of the Issuance of the Standard This Standard was issued on 14 Jumada II, 1431 A.H., corresponding to 28 May 2010 A.D. 1091