Ironing out the creases.

MALAYSIAN Business talks to Ahmad Adil, a partner in Ernst & Young Bahrain, on challenges facing Islamic financial institutions in increasing their viability and competitiveness, and the remedial steps being undertaken.

AHMAD ADIL IS RESPONSIBLE for business risk consulting and risk management services, primarily for banks and other financial institutions.

He travels extensively to advise the offices of Ernst & Young worldwide on structuring shariah-compliant transactions and is a member of the Ernst & Young specialist group in the Middle East for Islamic banking. He was in Kuala Lumpur recently, eager to share his views on liquidity risk management, in Islamic financial institutions in particular, and related issues. Excerpts: How does Islamic liquidity risk management differ from the conventional one? How has it evolved? In terms of liquidity risk considerations, there is no difference between conventional and Islamic banks. Basically, liquidity management involves the management of tenor mismatches arising from the profile of assets and liabilities and the resulting maturity and return considerations. The mismatch necessitates maintenance of or access to various forms of liquid assets to meet the liquidity obligations as and when they arise.

The difference arises when the investment avenues in conventional finance focus only on risk-adjusted optimal returns whilst for the Islamic financial institutions, in addition to risk-return considerations, they can only undertake investments and transactions that are shariah- compliant.

Shariah does not recognise money as a commodity and therefore there is prohibition on payment or receipt of interest. In addition, all investments and transactions have to be backed by tangible assets. These assets should not belong to prohibited industries such as alcohol, gambling or tobacco. Similarly, excessive speculative trading in financial instruments …