a.IBs must have appropriate governance processes, including Board and Senior Management oversight, in order to identify, measure, monitor, report and control the liquidity risk in compliance with Shari’ah rules and principles, and within the context of available Shari’ah-compliant instruments and markets.
b.The governance structure of an IB must specify the roles and responsibilities of senior management, the Internal Shari’ah Supervision Committee (ISSC), and its functional and business units, including that of the risk management department, with appropriate segregation between operational and monitoring functions.
c.IBs must have in place a sound and comprehensive liquidity risk management framework, integrated into the bank-wide risk management process. The primary objective of the liquidity risk management framework must be to ensure, with a high degree of confidence, that the IB is able to maintain sufficient liquidity to meet its regular funding requirements and payment obligations in the normal course of business; and to help it withstand a reasonable period of liquidity stress based on its liquidity risk tolerance level. The source of funding could be IB specific or market-wide.
d.The liquidity risk management process of an IB must involve adequate tools to identify, measure, monitor, report and control the liquidity risk in compliance with Shari’ah rules and principles, including a plan to meet contingency funding requirements and setting limits on the basis of robust stress testing and scenario analysis.
e.The Board bears the ultimate responsibility for approving a comprehensive liquidity risk management framework, and for monitoring the level of liquidity risk by the IB. This framework must include strategy and robust policies for the management of liquidity risk by the IB, keeping in view the nature, size and complexity of its operations, business model, funding profile, mix of Shari’ah-compliant financing and investment products, and availability of Shari’ah-compliant liquidity instruments and mechanisms.
f.Senior management is responsible for executing and implementing the Board-approved strategy and must develop policies for managing the liquidity risk; for having a clear view of all sources and linkages of liquidity risks by taking a holistic approach to risk management; and for laying down the procedures and processes for continuous monitoring of liquidity risk and reporting to the Board.
g.The strategy and policies of IBs for liquidity risk management must explicitly incorporate both normal and stressed times scenarios.
h.The liquidity risk management framework must cover identifying, mitigating and managing liquidity risk. The IB must ensure that its liquidity risk management function does not take the opportunity to make profits at the expense of prudent management of liquidity risk.
i.Liquidity risk management strategy and policies must cover all on and off-balance sheet items. IB must perform an impact analysis on management and mitigation of liquidity risks arising from new business initiatives and product approvals. The IB must have comprehensive and appropriate internal controls and internal audit mechanisms, in order to evaluate and test the adequacy of controls in the liquidity risk management framework. The senior management must ensure that all such functions and business units are operating under the approved policies, procedures and limits.
j.IBs must have a robust Shari’ah governance framework in accordance with the Standard re Shari’ah Governance for Islamic financial institutions in order to ensure an effective independent oversight of Shari’ah compliance, especially liquidity risk management mechanisms and instruments. The involvement of the ISSC must include the following elements:
i.approving new Shari’ah-compliant liquidity risk management instruments and mechanisms, including Shari’ah-compliant hedging products;
ii.ensuring proper execution of its approved products and mechanisms,
iii.verifying and controlling the non-commingling of funds between Islamic windows/branches/subsidiaries and parent conventional entities; and
iv.ensuring Shari’ah compliance of the IB’s placements with other entities, including placements with conventional banks, if any.