“Conventional tools and instruments that have been developed over time by the financial sector came about to fill a need.”

Sheikh Dr. Mohamed Elgari

Shariah Committee Chairman, The IILM

From a Shariah compliance perspective and given your market interactions, what do you consider to be the state of current instruments being used in the industry for liquidity management?

Conventional tools and instruments that have been developed over time by the financial sector came about to fill a need. This need could be to manage a risk or make profit or secure stability and sustainability.

These are legitimate needs from the Shariah point of view and therefore deserve to be met. The solutions provided by conventional banking need not be rejected wholesale. There is no basis for this in Shariah. As long as we face the same problem and we, too, need a solution, we should explore all possibilities, including from the conventional system.

If it turns out that the conventional solution includes elements that are prohibited from the Shariah point of view, all we need to do is restructure the same instrument to deliver the same economic outcome but with Shariah acceptable contractual relationships. A case in point is the repurchase agreement (repo). Repo is one of the most important tools to manage liquidity. Clearly, the conventional structure cannot be accepted because it is interest-based lending. But this instrument itself is very effective in meeting a legitimate need. We were able to reformulate the structure from “loan” to “sale”, thus benefiting from the accumulated experience and knowledge in the field of repo liquidity management but without violating the Shariah.

So, we are always up to date in developing and utilising the best and latest practices. Shariah is never a hindrance to progress