By Bernardo Vizcaino
DUBAI, April 4 (Reuters) – Gulf institutions plan to spur
development of the Islamic finance industry by setting up a bank
that would boost liquidity in sharia-compliant markets. But the
mandate of the bank is so wide that it may struggle to have an
impact early on.
The Islamic Development Bank (IDB), a Jeddah-based
multilateral institution, signed a memorandum of understanding
with the Qatari government and Saudi Arabia’s Dallah Albaraka
Group on Tuesday to launch an Islamic bank based in Doha.
The bank will aim to facilitate Islamic interbank trade,
develop liquidity-management solutions and launch an Islamic
securities market, IDB president Ahmad Mohamed Ali said in a
statement.
It will address “the dearth of senior financiers” and “the
absence of market liquidity between Islamic banks”, he said
without giving a timeline for the bank’s launch. The bank would
also become involved in infrastructure projects and
standardising Islamic financial products.
The bank’s ambitions address some of the main weaknesses of
the Islamic finance industry. Liquidity is a major issue.
Last month, for example, the Bahrain-based International
Islamic Financial Market and the International Swaps and
Derivatives Association launched a contract template for Islamic
profit rate swaps, to help Islamic financial institutions better
hedge risk. But banks will find it hard to use the swaps without
a liquid market; by becoming a major player in swaps, the new
bank could accelerate growth of the market.
But the breadth of the bank’s mandate means it may struggle,
initially at least, to focus effectively on a single area.
Interbank trading, infrastructure financing, product design and
standard-setting are different skills which the bank will need
to build from scratch – possibly setting off a bidding war for
some of the top Islamic finance talent in the Gulf.
It is unclear if the bank’s resources will be sufficient for
the tasks. The three founders said the bank would have $1
billion of capital – not a massive amount for a bank – and that
they had agreed to provide $500 million of that amount. They did
not specify where the rest of the capital would be obtained.
There has been market talk in the past that institutions
might be set up elsewhere to help develop the Islamic finance
industry, for example in Bahrain. One such plan which has come
to fruition is the Malaysia-based International Islamic
Liquidity Management Corp, established in November to issue
short-term instruments compliant with Islamic law. Its mandate
is narrower than that of the IDB’s proposed bank.
(Editing by Andrew Torchia)
