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KembaraXtra – Islamic Finance: Short-Term Ṣukūk for Liquidity Management (Global Practices)
Purpose of Short-Term Ṣukūk
Short-term Ṣukūk are designed primarily to support liquidity management for institutions offering Islamic financial services (IIFS). Conventional treasury bills are interest-based and therefore not Sharīʿah-compliant. To fill this gap, central banks and international institutions have developed Islamic equivalents of treasury bills using Sharīʿah contracts such as Salam and Ijārah.
1. Bahrain: Salam Ṣukūk as Islamic Treasury Bills
- Issued by the Central Bank of Bahrain )CBB) on behalf of the Government of Bahrain.
- Structured as Salam Ṣukūk, which are the Sharīʿah equivalent of government treasury bills.
- Issued on a monthly basis.
- Subscribed mainly by Islamic banks and IIFS to invest excess short-term liquidity.
How it works (simple):
- Investors pay the full purchase price upfront.
- The CBB promises to deliver a specified quantity of a commodity (e.g. aluminium) at a future date.
- The price difference represents the investor’s return.
Why Salam is suitable:
- It is a recognised Sharīʿah contract for short-term financing.
- Widely used for liquidity management.
2. Gambia: Short-Term Salam Ṣukūk
- Issued by the Government of Gambia through its central bank.
- Introduced in 2007, alongside conventional treasury bills.
- Denominated in the local currency.
- Short-term in nature and targeted at domestic Islamic financial institutions.
Significance:
- Demonstrates how even smaller economies can adopt Islamic money market instruments.
- Supports domestic liquidity management in a Sharīʿah-compliant manner.
3. Singapore: Ijārah Ṣukūk as Islamic Treasury Bills
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- Issued in February 2009 by the Monetary Authority of Singapore (MAS).
- Total issuance: SGD 200 million.
- Structured as Ijārah Ṣukūk (lease-based).
Underlying asset:
- MAS used its head office building as the leased asset.
Purpose:
- To meet the short-term liquidity needs of IIFS operating in Singapore.
- To provide a high-quality Sharīʿah-compliant money market instrument.
4. Global Initiative: IILM Short-Term Ṣukūk
To address liquidity challenges at the international level, the International Islamic Liquidity Management Corporation (IILM) was established.
Inaugural Issuance (2013)
- Date: 26 August 2013
- Size: USD 490 million
- Tenure: 3 months
- Backed by sovereign assets
- Highly rated and tradable
- Distributed globally through a multi-jurisdictional primary dealer network
Objective:
- To provide IIFS worldwide with:
- Highly rated,
- Short-term,
- Tradable,
- Sharīʿah-compliant liquidity instruments.
Subsequent IILM Issuances
Since 2013, IILM has continued issuing similar short-term Ṣukūk, including:
- USD 860 million (14 January 2016)
- USD 1.34 billion (18 February 2016)
- USD 860 million (13 April 2016)
These issuances:
- Are mainly absorbed by Islamic banks,
- Help meet Basel III liquidity requirements,
- Strengthen the global Islamic money market.
Why These Short-Term Ṣukūk Are Important
- Address the shortage of Sharīʿah-compliant money market instruments.
- Enable Islamic banks to:
- Park excess liquidity,
- Meet short-term funding needs,
- Manage liquidity efficiently.
- Reduce reliance on non-compliant instruments.
- Enhance financial stability in Islamic finance.
Simple Exam-Friendly Summary
- Salam and Ijārah Ṣukūk act as Islamic treasury bills.
- Bahrain, Gambia, and Singapore developed domestic solutions.
- IILM provides a global short-term Ṣukūk platform.
- These instruments are vital for Islamic liquidity management.
- They are short-term, highly rated, tradable, and Sharīʿah-compliant.
Key Takeaway
Short-term Ṣukūk issued by central banks and international institutions play a critical role in Islamic money markets, ensuring that Islamic financial institutions can manage liquidity efficiently while remaining fully compliant with Sharīʿah principles.
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