leveling the playing field in liquidity management & solutions for participation banking in...

Leveling the Playing Field in

Liquidity Management

Solutions For

Participation Banks

Erkan KilimciExecutive Director for Markets Department

2

Outline

Liquidity and Central Bank

Mandates of Central Bank

Balancing banking liquidity

Participation Banks at a glance

Liquidity outlook of participation banks compared to conventional ones

Diagnosis & Remedies

Securities market

Interbank market

Regulatory environment

CBRT’s involvement

3

Central Bank has many tasks for liquidity management.

• Ensuring smooth functioning of payment systems.

• Having an operational structure with sufficient flexibility against unexpected developments in the markets.

• Maintaining the level of short term interest rates within interest rate corridor and around the level determined by the Committee.

• Ensuring that instruments in use to support the efficiency of the monetary policy.

• Ensuring efficient and stable operation of money markets in accordance with the liquidity management strategy.

4

Net liquidity deficit in the banking system is a dynamic process.

Funding Need of the System(FNS)

Changes in Base Money (volume of currency issued +

TL Deposits of Banks)

CBRT operations

Treasury transactions against TL

5

Net liquidity shortage has increased over 2013

Source: CBRT

Funding Need of Banking System

0

20

40

60

80

100

120

012013 072013 012014 072014 012015 072015 012016

Bn

6

Rising TL funding need is a challenge for banks.

Increase in TL Funding Need (2015)

- 53 Bio TRY

Bank A

CBRT FX Sale(2015)

25 Bio TRY

BankC

BankB

7

Participation Banks are not immune to the funding need.

ASSETS LIABILITIES

Cash & Central Bank(RR) 500 Deposit 4000

Securities 1000 Funding 1000

Loans 5000 Capital 1500

6500 6500

CentralBank

ParticipationBank

BankC

BankC

B/S of a Participation Bank

280 TL

100 USD

560 TL

200 USD

840 TL

300 USD

8

Central bank is the lender of last resort if there is a shortage of liquidity.

ASSETS LIABILITIES

Cash & Central Bank (RR) 500 Deposit 4000



6500 6500

ASSETS LIABILITIES

Cash & Central Bank(RR) 500 Deposit 3160



6500 6500

9

Outline







Securities market

Interbank market



10

Asset growth of PBs is slightly higher while the liquid asset growthrate of CBs is negative

TRY Asset Growth

Source:TBB,TKBB

11

FX Asset growth of PBs is quite faster compared to that of CBs

Source:,TBB,TKBB

FX Asset Growth

Source:TBB,TKBB

Participation banks’ TRY liquidity ratio is quite lower compared tothat of conventional banks.

12

TRY Balance Sheet Liquidity

Source:TBB,TKBB

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014 2015

%

Participation Conventional

Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets

*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored

Participation banks’ FX liquidity ratio is higher compared to that of conventional banks.

13

FX Balance Sheet Liquidity

Source:TBB,TKBB



0

10

20

30

40

50

60

70

80

90

2010 2011 2012 2013 2014 2015

%


Participation banks’ overall liquidity ratio is lower compared to thatof conventional banks.

14

Composite Balance Sheet Liquidity

Source:TBB,TKBB



0

5

10

15

20

25

30

35

40

45

2010 2011 2012 2013 2014 2015

%


The share of securities within liquid assets of participation banks is quite lower compared to conventional banks.

15

TRY Liquid Asset Composition

Source:TBB,TKBB

10 12 9 9 11 9

60 60 66 6267 70

30 28 26 2922 21

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015

% Conventional Banks

HTM Securities AFS SecuritiesCash and Reserves

64

45 38 34 29 24

25

42 52 5453

51

11 14 10 12 18 25

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015

% Participation Banks


The share of securities within liquid assets of participation banks is quite lower compared to conventional banks.

16

FX Liquid Asset Composition

Source:TBB,TKBB

3651

67 74 71 71

38

28

27 19 20 2026 21

6 8 9 8

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015

% Conventional Banks


99 100 96 90 90 88

0 0 4 10 10 12

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015

% Participation Banks


Simple metrics show inadequacy of Islamic securities and lack of essential types of securities that will facilitate a better ALM.

17

Outstanding Sovereign Securities(as of October 31,2015)vs. Banking Sector Assets

Source:TBB,TKBB, Turkish Treasury,Bloomberg

Securities Domestic Bonds Fixed-Coupon CPI-Indexed FloatersDomestic

Sukuk(Fixed-coupon)

Eurobond Eurosukuk

(TRY, Thousand) 432,448,687 248,718,120 99,449,858 84,280,708 6,563,083 155,086,200 10,875,000

Banking Sector Assets

Conventional TRY

Participation TRY

Conventional FX

Participation FX

(TRY, Thousand) 1,053,234,979 73,973,333 626,715,408 45,241,143

Outstanding Securities/Banking Assets*(%)

41.06 8.87 24.75 24.04

Sukuk Gap** 23,765,983

*Conventional securities/Conventional Banking Assets or Islamic securities/Participation Banking Assets in relatedcurrencies** The amount of sukuk needed to be issued to level playing field for IFIs with conventional counterparts)

18

Outline







Securities market

Interbank market



Deepening capital markets with adequate shariah compliant securities is needed.

19

Problem : PBs do not have sufficient securities in their liquid asset portfolio

Suggestion : A wider pool of securities tradeable in secondary market isrequired

Problem : A mechanism for secondary market liquidity is missing

Suggestion : PD structure and a sukuk yield curve is needed

A more inclusive and efficient interbank market is a must.

20

Problem : Shariah compliant tradeable securities to be used for interbanktransactions is insufficient

Suggestion : Treasury or other public institutions (Eximbank) should issuehigh quality tradeable securities (ie. Ijarah , wakalah and hybridsukuk) of various tenors

Problem : Lack of fund flows among conventional and participation banks

Suggestion : A robust money market platform to facilitate fund flows amongconventional and participation banks should be built.Securities trading and shariah complaint repo like contractsshould be promoted.

Regulatory infrastructure for various contracts must be put in place.

21

Problem : All of required contracts cannot be effectively used.

Suggestion : Regulatory &supervisory bodies and exchange operators shouldadopt various Islamic contracts to make use of different and newshariah complaint products.

Adoption of various contracts and promoting different products will alleviaterisks stemming from lack of adequate shariah compliant liquidiy managementinstruments and increase flexibility for the PBs

CBRT facilitates leveling playing field for the PBs to improve their liquidity management.

22

CBRT has a funding facility for the PBs since 2011 based on buy and sell-backof lease certificates (ijarah sukuk ) issued by Treasury with the right to forsakethe sell-back (unbinding promise by CBRT to sell back securities while the buy-back promise of the PBs is binding)

Adoption of different repo structures like commitment based tripartite repounder BIST and collateralized commodity murabaha is on the way (An efficientorganized commodity market under BIST is required)

The pool of eligible collaterals for CBRT funding is to be widened in time (IILMsukuk, gold, other high quality and liquid assets)

CBRT is one of the shareholders of IILM which is mandated to introduceshariah-compliant liquidity management instruments to the industry.

Available CBRT liquidity facilities and prospective steps

23

CBRT Liquidity Channels

ConventionalBanks

ParticipationBanks

Prospective steps

OMO through CBRT Markets Department

Yes Yes Expanding eligible collateral base

OMO Fundingthrough BIST Repo Market

Yes No Commitmentbased tripartite repo market under BIST

Deposit Facilities Yes No Adoption of various contracts like commoditymurabaha

Thanks…

Erkan KilimciExecutive Director for Markets Department

leveling the playing field in liquidity management & solutions for participation banking in...

Economy & Finance