London—Moody’s Investors Service says that the liquidity coverage ratios (LCRs) of Islamic banks in key Asian and Gulf Cooperation Council (GCC) countries highlight sound liquidity profiles and broad compliance with Basel III regulatory requirements.
“In the report, we highlight that a key driver of LCR performance is the funding profile of banks and, in this context, over-reliance on corporate deposits and unsecured wholesale funding means higher potential liquidity pressures,” says Simon Chen, a Moody’s Vice President and Senior Analyst.
“However, banks with a greater proportion of retail deposits that are considered more ‘sticky’, typically display stronger LCRs,” adds Chen. In Asia, the retail funding of Islamic banks is constrained by their small branch networks, which results in weaker LCRs when compared to their conventional peers.
By comparison, in GCC countries, Islamic retail customers tend to be more Shari’ah sensitive, providing Islamic banks with a large base of low-cost retail savings deposits, hence supporting their stronger LCRs.
Moody’s conclusions were contained in its just-released report on Islamic banks in Asia and GCC countries, “Islamic Banks: Strong Liquidity Profiles driven by Retail Focus but Deeper Sukuk Markets needed”. The report was authored by Chen and Khalid Howladar, Moody’s Global Head of Islamic Finance.
“When compared with conventional peers, Islamic banks in some jurisdictions clearly face a shortage of Shari’ah-compliant high-quality liquid assets (HQLAs), putting them at a disadvantage,” says Howladar.