Risk Management in

Islamic Financial Instruments

3.7. SHARIAH-COMPLIANT LENDER OF LAST RESORT FACILITY

The Shariah-compliant Lender of Last Resort, or SLOLR, facility is a financial safety net. It

differs from the traditional LOLR in that the financial contracts to support the structure must

be Shariah compliant. Open market operations (OMOs) and standing facilities are the two

mechanisms used by RSAs for monetary operations of a central bank. According to a survey by

the IFSB, RSAs made use of OMOs and standing facilities, but the two tools did not necessarily

comply with Shariah and were not suitable for transactions with IIFS. The survey also showed

that, in a quarter of the RSAs’ jurisdictions, there did not exist SLOLR facilities, but they did

distinguish between conventional financial service institutions and the IIFS.

However, nine of the 24 RSAs said that they did have SLOLR facilities and did not distinguish

the IIFS from conventional financial service institutions. This result raises a critical issue for

the reputability of the IIFS, since conventional LOLR facilities do not comply with Shariah. The

lack of SLOLR facilities in some countries is due to missing legal and regulatory frameworks

and the small size of the IIFS. The RSAs who have developed a mechanism to provide SLOLR

have used Muḍārabah, Mushārakah, Murābahah, Commodity Murābahah, Tawarruq, Qarḍ with

Rahn as Shariah compliant mechanisms to provide SLOLR. Each of these mechanisms has their

own strengths and weaknesses.

The major constraints to the development of SLORL, according to the RSAs participating in the

IFSB survey, were the need to modify existing laws and regulations, having a range of Shariah

compliant good collaterals available, and setting procedures and guidelines on SLOLR (IFSB

104-114). IIFS provides a guideline on some relevant questions pertaining to SLOLR that may

be asked:



How are SLOLR mechanisms structured by RSAs?



Is an SLOLR mechanism available in the IFSI for IIFS?



What is the current assessment of the development of SLOLR facilities as a safety net?



Have the monetary tools used by the RSAs been adapted to cater to specificities of IIFS?



What are the key challenges and issues that need to be addressed before developing the

SLOLR facilities as a safety net?

More recently, the Islamic Financial Services Board (IFSB) has undertaken initiatives to

address the guidelines for SLOLR to enhance the risk management and stability of the Islamic

financial services industry; the relevant IFSB publications include:

Guiding Principles of Risk Management, December 2005

Technical Note on Issues in Strengthening the Liquidity Management of IIFS: The

Development of Islamic Money Markets, March 2008

3.8. DISPUTE RESOLUTION MECHANISM IN ISLAMIC FINANCIAL

MARKETS AND IMPLEMENTATION

Effective and efficient dispute resolution requires clarity of the laws governing contracts and

agreement on the specific mechanisms to be used in resolving a dispute (Grais 10). One of the

major entities responsible for settling financial disputes is the International Islamic Centre for