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  • Measuring and Monitoring Liquidity

    • RM-5.3.5

      Islamic bank licensees must identify any future shortfalls in liquidity by constructing maturity ladders based on appropriate time bands, including those specified by the CBB in Module LM. The Islamic bank licensees may have their own criteria for classifying cash flows, including behavioral methods, and may consider differentiating the types of cash flows as indicated below:

      (a) Known cash flows — the maturities and the amounts are known in advance. This category includes contractual receivables from Murabaha, Ijara, IMB receivables and Diminishing Musharakah;
      (b) Conditional but predictable cash flows (Salam and Istisna') — conditionality is defined in terms of the type of contract or performance of work based on the agreed terms and conditions over an agreed period; or
      (c) Conditional and unpredictable cash flows — in some cases, an investment in a Musharakah is for an open-ended period and an exit strategy may be assessed periodically. The redemption of invested capital and possible levels of return on investment is conditional upon the performance of the activities.
      January 2013

    • RM-5.3.6

      When calculating net funding requirements (NFR), a substantial influence on the liquidity situation of an Islamic bank licensee relates to the management of IAHs' expectations. While the basis of an NFR calculation is to assume that the funds are repaid at the contractual maturity date, it may not be realistic to assume that all IAHs will maintain their funds at the Islamic bank licensee until maturity. Therefore, an internal assessment of their expectations and incentives will be part of an NFR calculation.

      January 2013

    • RM-5.3.7

      Due to Islamic bank licensees' dual role in meeting their obligations to current account holders and managing the expectations of their IAHs, Islamic bank licensees must make periodical cash flow analyses under various market scenarios and conditions.

      January 2013

    • RM-5.3.8

      The scenarios may vary, depending on local market conditions, and may be based on:

      (a) A "normal" operating environment (for example a steady state condition); and
      (b) Scenarios of adverse (stressed) circumstances (for example non-linear events and chaotic conditions). For example:
      (i) The analysis should include assumptions about the repayment of invested capital to the IAH. In the event of investment losses, the extent to which the losses will be mitigated by the use of the IRR needs to be considered;
      (ii) The scenarios should be based on relevant assumptions based on factors affecting the Islamic bank licensee's on- and off-balance sheet exposures. Liquidity levels and early withdrawal profiles computed under these scenarios will be back-tested periodically to validate the underlying assumptions of the measurement process; and
      (iii) In analyses based on behavioral assumptions and scenarios, Islamic bank licensees should assess and apply the liquidity measures that reflect the specificities of each portfolio. In the case of certain market practices, Islamic bank licensees may have different types of portfolios (i.e. CIUs that are treated as off-balance sheet items). The size and characteristics of the assets, which Islamic bank licensees hold in relation to the investment portfolios financing CIUs, will determine their specific liquidity profiles.
      January 2013

    • RM-5.3.9

      Islamic bank licensees must establish the maximum amounts of cumulative liquidity mismatches which they consider acceptable (subject to the requirements of Module LM) and manageable for different time bands, as a percentage of total funds available. Assets must be clearly segregated according to sources of funds, and Islamic bank licensees must monitor their liquidity exposures separately according to the nature and mix of their fund providers — current account holder and unrestricted IAH, which can be expected to vary substantially. The effects of liquidity shortages may vary according to the fund providers' liquidity preferences; hence, separate limits on liquidity mismatches must be set up accordingly. These limits must be regularly reviewed, taking into account the Islamic bank licensee's liquidity situation, economic climate and market conditions.

      January 2013