Abu Dhabi (UAE): The National Bank of Abu Dhabi (NBAD) and Abu Dhabi Islamic Bank (ADIB) claim to have completed the first Shariah-compliant equivalent based on a collateralized Murabaha transaction of a conventional repurchase arrangement (repo), which conventional banks and financial institutions (FIs) use to lend and borrow at low risk.

A statement from NBAD stressed that the two banks concluded a one week maturity deal valued at $20 million against Malaysian and Abu Dhabi government-related entity sukuk.

"NBAD and ADIB jointly embarked on this initiative to formalize the Master Collateralized Murabaha Agreement (MCMA), thus enabling Islamic banks to utilize their holdings of sukuk. The MCMA offers a Shariah-compliant alternative to the repurchase arrangement, which conventional banks and financial institutions (FIs) use to lend and borrow at extremely low risk," explained the statement.

 
Both banks are confident that the MCMA will provide Islamic financial institutions with an efficient and cost effective tool to manage short and medium-term liquidity.

According to Mahmood Al-Aradi, general manager financial markets division, NBAD, "This type of transaction will set the stage for future collateralized Murabaha trading in the sukuk market, which will greatly boost this segment and the secondary market."

His colleague, Mark Pritchard, head of Islamic institutional coverage, NBAD, is even more bullish about MCMA's fit with the flourishing sukuk market.

"With global issuance of sukuk this year to be around $25 billion to $30 billion, the MCMA will be of significant benefit to the Islamic financial market participants who, up to now, haven't been able to fully maximize their holdings of sukuk whilst still maintaining ownership", he said.

In fact, UAE central bank governor, Nasser Al-Suwaidi, sees liquidity management in the Islamic finance industry as a major challenge for the industry going forward. In a keynote speech at the WIBC Asia conference in Singapore in June 2011, he strongly hinted about a forthcoming solution, namely the MCMA.

"Another challenge is the short-term liquidity management at Islamic banks and other financial institutions. This is not a straight forward issue and has been under discussion between Islamic banks and central bank of the UAE. There is now a reasonable proposal to advance a solution for this issue," he added.

The MCMA structure is in fact a repo equivalent which accepts UAE Central Bank Islamic certificates of deposits as collateral against cash, thus enabling liquidity to be freed up. According to the UAE central bank, at end April 2011, banks in the UAE were holding some AED12 billion of these Islamic certificates of deposits.

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