State Bank raises liquidity requirements for Islamic banks

Statutory liquidity requirement for Islamic banks has been raised to 14 per cent of total demand liabilities.

KARACHI: The State Bank of Pakistan (SBP) has increased statutory liquidity requirements (SLR) for Islamic banks to 14 per cent, effective from April 1.

According to a notification issued by the SBP Domestic Markets and Monetary Management Department on Wednesday, SLR for Islamic banks has been raised to 14 per cent of total demand liabilities, including time deposits with tenors of less than a year.

SBP has clarified that all holdings of the government’s Ijara Sukuk will be fully counted. As part of this requirement, holdings of State Bank-approved public sector Sukuk will be counted up to seven per cent, for the same.

“Single issuer holding limit of five per cent of total time and demand liabilities stands abolished,” stated the notification.

The statutory liquidity requirement forces financial institutions to convert some of their cash holdings into financial papers, such as treasury bills, Ijara Sukuk and other such instruments.

“By increasing the SLR, the State Bank will be reducing the ability of Islamic banks to increase exposure in riskier assets,” explained InvestCap Head of Research Khurram Schehzad, adding that the move may have been triggered by rising non-performing loans in the sector.

The analyst asserted that the higher level of SLR may be beneficial for Islamic banks in the current scenario, where there is excessive liquidity in the system, with limited avenues for investment and relatively higher risk in the economy.

He pointed out that Islamic banks typically do not invest as heavily in government treasury bills and bonds as conventional banks, so the move by the central bank could force them to commit more funds to relatively risk-free investments.

Published in The Express Tribune, February 24^th, 2011.