CHAPTER 8Collateralisation in Islamic Capital Markets

By Richard Thomas

In recent years, the development of the breadth and depth of the sukuk market in and across borders has demanded consequential development of market infrastructure, and among the most critical areas to be addressed has been the work done on efficient collateralisation in Islamic Capital Markets (ICM).

The demand to regularise the approach to collateralisation is driven by two principal factors: 1) the need for, and current dearth of, High Quality Liquid Assets (HQLA) to meet the changed regulatory environment for Islamic banks; 2) the growth in primary ICM market issuance for structured trade, project and infrastructure purposes, and those which span both issues including growth in issuance of Basel III Tier 1 sukuk and covered sukuk. Finally, the chapter deals with some specific and unique risks associated with sukuk, both idiosyncratic and non-systematic, and some reflections on mitigation.

Looking to the future, and given the continuing challenge of meeting the apparently idiosyncratic requirements of Shari'ah compliance, we might see these factors coming together in a form of clearing for Islamic financial products. Proposals for such a mechanism already have some shape in Malaysia where domestic and foreign investors can buy and sell Islamic debt instruments through exchange and over-the-counter (OTC) markets. Bank Negara's Real Time Electronic Transfer of Funds and Securities (RENTAS) has itself been ...

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