THE BANGKO SENTRAL ng Pilipinas (BSP) has released proposed guidelines for the management of liquidity risks by Islamic banks and banking units for Shariah-compliant instruments.

In a draft circular posted on its website, the BSP said Islamic banks and banking units should not assume that Shariah-compliant instruments are identical to the characteristics of their conventional counterparts.

“Any instrument to be used in liquidity management should be acceptable to the Shariah Advisory Council and is appropriate to the context in which it is to be used,” the BSP said.

“Where the management of liquidity risk involves the possibility of raising funds in the money market, the behavior of the Islamic money market should not be assumed to be identical to that of the conventional market,” it said.

Concerned parties may send their feedback on the draft circular to the BSP  until Dec. 4.

Among the instruments under Islamic financing is the sukuk, which is similar to the structure of bonds but entails direct asset ownership interest.

“Sukuk held as liquid assets may be less liquid than conventional bonds held for the same purpose,” the draft circular said.

For regulatory requirements, the proposal is to start an observation period from the effectivity of the circular until Dec. 31, 2024. By January 2025, a minimum liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) amounting to 100% will be required for both Islamic banks and banking units.

LCR refers to the proportion of highly liquid assets held by banks or banking units that serves as a gauge of its capacity to perform short-term obligations and is an assurance that the banks can withstand short-term liquidity risks. Meanwhile, the NSFR is meant to gauge banks’ ability to cover for long-term assets.

“As the domestic Islamic banking market is still in its early stage of development, the BSP shall adopt a flexible approach on regulatory compliance,” the BSP said, noting it will engage responsively with players and new entrants in the Islamic banking system regarding the implementation of the LCR and NSFR.

The central bank issued BSP Circulars 1069 and 1070 in December 2019 to lay out the guidelines for the establishment of Islamic banks and banking units as well as the Shariah Governance Framework. This move followed the legislation of Republic Act No. 11439 which allowed traditional banks to build Islamic banking operations upon seeking approval from the Monetary Board.

Prior to the coronavirus pandemic, BSP Managing Director Arifa A. Ala said two to three banks have expressed interest to set up Islamic banking units in the Philippines. — L.W.T. Noble