KUALA LUMPUR: Bank Negara Malaysia (BNM)’s International Islamic Liquidity Management Corp (IILM) will issue short-term papers as part of efforts to enhance cross-border flows.
According to BNM governor Tan Sri Dr Zeti Akhtar Aziz, the short-term papers will be issued in international reserve currencies, such as the US dollar and the euro.
“The initial ones will be in major currencies because it is to facilitate cross-border liquidity management,” she told reporters on the sidelines of the Global Islamic Finance Forum (GIFF) here yesterday.
Zeti added that the size of the short-term papers would be announced when it had been put in place.
The IILM is a collaborative effort by 11 central banks or monetary agencies, as well as two multilateral organisations to assist institutions offering Islamic financial services in addressing their liquidity management. The initiative will also facilitate greater investment flows for the Islamic financial services industry.
Zeti said the regulators collaborating with BNM for the setup of IILM would be the shareholders of the initiative, as well as sit on its board.
The 13 signatories for the setup of IILM include BNM, the central banks of Indonesia, Iran, Luxembourg and the United Arab Emirates, and multilateral organisations such as The Islamic Development Bank and the Islamic Corporation for the Development of the Private Sector.
During her presentation of the Financial Stability Report at the GIFF yesterday, Zeti said each shareholder would contribute US$5 million (RM15.5 million) as their capital for IILM.
Later, she told the media that IILM is expected to be operational within the first half of next year.
“We are in the process of hiring a CEO and putting in place other staff from the private sector who are going to be operating this new institution. It will be housed in the (Petronas) Twin Towers,” she said.
The IILM was unveiled on Monday during the GIFF, as part of an initiative to facilitate the growing significance of the international dimension of Islamic finance and its increased role in the international financial system.
Meanwhile, Zeti said moving forward, the Task Force on Islamic Finance and Global Financial Stability would look at three key areas of priority to further strengthen and enhance the entire Islamic finance ecosystem. The key areas are:
• Strengthening the infrastructural building blocks of the Islamic financial services industry to further enhance the industry’s resilience;
• Accelerating the effective implementation of syariah and prudential standards and rules to facilitate the creation of a more stable, efficient and internationally integrated Islamic financial services industry; and
• Creating a common platform for the regulators of the Islamic financial services industry to enhance constructive dialogue.
Zeti, who heads the task force currently, said it recommends the establishment of an Islamic Financial Stability Forum for the Islamic Financial Services Board members to build cross-border dialogue in efforts to promote financial stability within the Islamic financial system.
She said BNM would announce one or two banks that would be awarded licences to operate Islamic mega-banks with capital of at least RM1 billion here, under the financial sector liberalisation announced last year.
In June, BNM awarded five commercial licences to foreign banks to increase competition in the local banking industry. It also recently awarded four family takaful licences to joint-venture companies that comprised local and foreign insurers.
Stable interest rates
On raising interest rates, Zeti said that the country’s overnight policy rate (OPR) of 2.75% is at “appropriate levels”.
“We have a strong domestic economy. However, the external environment will result in some implications in certain sectors.
“Going forward, Malaysia will remain firmly on its recovery growth path although we may see some moderation. Certainly, if it is managed well, we can actually achieve a 6% growth in 2011,” she said.
Zeti added that the ringgit still reflects underlying fundamentals but there will still be greater volatility in this environment not only in the ringgit but also other currencies, including major ones.
“The ringgit is determined by the market. We are there to ensure orderly market conditions. Yes, we have seen the ringgit strengthen by about 10% against the US dollar but it has also remained relatively stable against regional currencies. This is important to us because 60% of our trade is with the Asian region,” she said.
Zeti did not rule out the possibility of the central bank intervening in the currency market should conditions cause the ringgit to fluctuate too much.
“The central bank is well positioned to undertake any sort of intervening in the market if it becomes disorderly or very excessive movements take place within a short period of time,” she said.
No asset bubbles
Zeti added that despite the low interest rates environment that had caused financing to be cheap, BNM did not see the formation of asset bubbles taking place in Malaysia.
“In the event this is detected, we have the flexibility to implement measures to contain formation of such bubbles. At this point, there may be pockets of areas where we see some speculative activities but this is not generalised throughout the economy,” she said.
Zeti added that there is no inflationary pressure currently although the country is seeing strong demand. At the same time, the high household debt is also not a concern for the regulator.
“At this point in time, it (household debt) is being managed. We also have various institutional arrangements to make sure it is not beyond prudential levels. Right now, when we look at the non-performing loans for the household sector, they have not really increased significantly.
“It is not an area of concern but this is something where we will implement measures going forward to ensure that it will not be a destabilising factor to our economy. Consumption demand is becoming a very important driver of growth but at the same time, we want to progress in a manner that is within the prudential levels,” she said.
This article appeared in The Edge Financial Daily, October 27, 2010.
Source : http://www.theedgemalaysia.com/highlights/176109-bnms-islamic-liquidity-plan.html - Oct 27, 2010
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