Responses to Observations and Inquiries from Islamic Banks Regarding Instructions on the Legal Liquidity Ratio for Islamic Banks

Responses to Observations/Inquiries from Islamic Banks Regarding Instructions on the Legal Liquidity Ratio for Islamic Banks

Observation/Inquiry Answer

Due to the limited issuance of Sukuk issued or guaranteed by the government, as well as the difficulty of liquidating Murabaha Sukuk for Sharia reasons, we propose treating financing granted to the government or guaranteed by it as Sukuk issued or guaranteed by the government, by including it in the numerator of the ratio with a 100% weighting to be treated as government securities. The instructions have been amended, primarily by reducing the weighting of joint investment accounts to 20% instead of 30%, with the aim of canceling exceptions related to considering some facilities granted to the government against the components of the numerator of the legal liquidity ratio, and to assist Islamic banks while keeping legal liquidity ratios within current rates.

Clarification of the Sukuk item with a long-term credit rating between A+ and BBB- or its equivalent, as the attached Excel model has been amended to add a condition that they must be issued by non-financial institutions within the attached Excel file, contrary to what was stated in the instructions. Item (Third/2/a) stated that "Sukuk that are liquidable or guaranteed by governments, central banks, public sector institutions, the International Monetary Fund, the Bank for International Settlements, the European Central Bank, the European Commission, or development banks, provided that they are assigned a zero risk weight according to regulatory capital instructions in accordance with Amended Standard No. (15) issued by the Financial Services Board No. (2018/72) dated 2018/2/4, and that they are traded in financial markets or repurchase markets, and Sukuk issued by the Jordanian Government/guaranteed by it for legal liquidity purposes only" should be included in assets with a 100% weighting. We deem this sufficient.

Confirmation of including in the liquidity numerator exceptions for Sukuk guaranteed by the Jordanian government in local currency (Jordanian Dinar) assigned a zero risk weight within the calculation of capital adequacy according to Central Bank approvals. The instructions indicated that all exceptions for Sukuk guaranteed by the government for the purpose of calculating legal liquidity are canceled.

Confirmation of including in the liquidity numerator exceptions for Jordanian government Sukuk in foreign currency assigned a zero risk weight within the calculation of capital adequacy according to Central Bank approvals. Maintain what was stated in the instructions in light of the reduction in the weighting of customer deposits to provide flexibility to banks and compensate them for the amount of financing granted to the government or guaranteed by it, thereby ensuring that the legal liquidity ratio remains in its current state.

Continuation of exceptions approved by the Central Bank of Jordan until their maturity, after the application of the new instructions, including financing granted to the government or guaranteed by it, and financing for the armed forces (Military Credit Fund)... etc.

Maintain currently applicable exceptions and implement the new instructions from their issuance date. Maintain what was stated in the instructions; they should not be applied retroactively, as canceling exceptions leads to a 49.5% decrease in the ratio (with other factors constant), noting that applying the instructions as they are will lead to a 19.7% decrease in the ratio overall. The weightings for the "Total Customer Deposits" item have been amended to provide flexibility to banks for granting facilities to governmental and semi-governmental entities without affecting the overall legal liquidity ratio.

In case of canceling exceptions, this will affect the future pricing of governmental and semi-governmental facilities, including the National Electric Power Company. It is sufficient to include them in the legal liquidity models, without referring to them in the instructions, as the exception will end upon the maturity of these facilities.

Confirmation of including in the liquidity numerator exceptions for financing granted to the Military Housing Corporation with a zero weighting according to previous Central Bank approvals.

Fixing the item related to exceptions for the (Military Credit Fund) in the general provisions of the new instructions, as it was only added to the new model in the draft new instructions. It has been added to the draft instructions.

Determine the value of (contributions to capital) whether it is at fair value or cost. The observation was taken into account and considered at fair value.

Rename the term "Joint Investment Accounts" to "Quasi-Equity" to align with Amended Islamic Financial Accounting Standard No. I. Amended.

Treatment of investment balances in international agencies within the numerator of the ratio under the item 'Investment balances and accounts with foreign banks'. Amended.

Allow Islamic banks to invest in the money market in Jordanian Dinar. Our circular No. (1686/1/10) dated 2014/2/5 (attached) indicated the cessation of: 1. International Murabaha in Jordanian Dinar. 2. International investment agencies in Dinar. 3. Jordanian Dinar currency swap contracts with other banks, with the exception of contracts between Islamic banks operating in the Kingdom. Therefore, adherence to what was stated in our aforementioned circular is required.