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Indonesia's Muamalat, Bukopin sign first Islamic-conventional banks' Shariah-compliant repo deal
The two financial institutions are the first Islamic-conventional pair to use the Shariah-compliant repo instrument since the release of central bank guidelines in April last year aimed at broadening the liquidity management tools available in the industry.
Bank Muamalat Indonesia’s director of corporate business, Indra Sugiarto, said that opening a repo transaction line with Bank Bukopin will add more liquidity for the Shariah-compliant bank and help it better manage its liquidity and liquidity contingency plans. At the end of March 2016, its total financing to deposit ratio (FDR) stood at 97.3 percent, up from 94.6 percent for the same period last year.
“Currently Islamic banks’ liquidity is still limited mainly because of the small number of Shariah-compliant interbank instruments, and most Islamic banks have a mismatch between funding and financing. That’s why we need instruments for our liquidity contingency plans,” he said.
According to guidelines from Bank Indonesia, the country’s central bank, Shariah-compliant repo transactions between Islamic and conventional banks are allowed where the former is the issuer. Conventional banks can be both sellers and buyers during the period of the agreement if the underlying certificates are Shariah-compliant. Agreements are to be no more than one year in maturity.
The repo instruments are based on an inter-bank mudarabah investment certificate known as SIMA, and SiKA, a Shariah-compliant certificate for interbank commodity trading.
Sugiarto added that the transactions will also benefit Islamic banks that commonly have higher funding to deposit ratios, meaning lower liquidity levels, than conventional lenders.
Bank Muamalat Indonesia plans to work with three other banks to gain more liquidity through the inter-bank Islamic repo transactions.
“Hopefully by the end of September we could work with two other Shariah-compliant banks and one conventional bank,” said Sugiarto.
Bank Indonesia’s head of department of financial market development, Nanang Hendarsah, said that such transactions will spur more activity in the secondary market. Currently, the volume of daily repo transactions stand at 1.8 trillion rupiah. He hopes the figure will rise to around 2-5 trillion rupiah by the end of this year.
“Demand for liquidity has grown following Eid al fitr and the long weekend after it. The market needs longer maturity certificates and also foreign banks as custodians to hold more bond auctions. We hope to see daily repo transaction reach an average 4 trillion rupiah by this August,” he added.
Source; Salaam Gateway
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