The National Bank of Abu Dhabi (NBAD) is to launch the first Sharia-compliant repurchase agreement, in a move expected to give a shot in the arm to the UAE's banking industry.
Repurchase agreements, also known as repos, allow a bank to lend money by buying an asset and reselling it at an agreed time, granting extra funds to lend or to purchase assets.
This results in an interest payment to the bank agreeing to buy the assets, but this is banned under Sharia law. In the case of Islamic repos, the interest payments are replaced by a murabaha payment.
Sameh al Qubaisi, a general manager within the bank's financial market's division, said the market could easily be worth between US$2 billion (Dh7.34bn) to $3bn in a year's time, also allowing Islamic banks access to new sources of funds.
"Today, Islamic banks are very cash-heavy, and regional rates are good. But the Islamic banks need to find alternative resources for their investments, either through real estate or long-term assets, which are illiquid."
The bank declined to reveal particulars of the inaugural deal, which is to be launched formally at the Global Financial Markets Islamic Forum in Abu Dhabi, beginning today.
The deal, which is the UAE's first, could lead to greater lending among Islamic banks, but Mr al Qubaisi said other companies may also express interest.
"Our focus is on wholesale," he added. "We're comfortable with insurance companies, investment banks, pension funds and sovereign wealth funds.
"The underlying asset has to be sukuk. Right now, a lot of Islamic banks are restricted in what assets they can buy. But the sukuk market has been very sluggish. "
NBAD is expected to offer repo agreements with maturities as short as overnight and up to one year.
Barclays has previously offered a Sharia-compliant repo deal outside the Emirates, while Bahrain's regulator is working on approving such agreements to boost liquidity for its own banks.
Some investment bankers said Islamic repos would prove beneficial to the UAE, but cautioned that careful regulation was necessary.
"Some of them are seeking liquidity, especially if they wish to liquidate government sukuk and long-term assets they have on their balance sheets," said Riad Saad, an Islamic product manager at the Abu Dhabi Commercial Bank.
"Given the crisis and what we've witnessed in this current liquidity squeeze, this is a very good way of extracting liquidity."
However, Mr Saad said the Central Bank should aim to tightly regulate the market.
Repo agreements were one method Lehman Brothers used to conceal its levels of indebtedness in the months leading up to its collapse.
Late last year, the Central Bank approved Islamic certificates of deposit. Mr Saad said it was too early to judge the success of those products.
"It hasn't been executed to a large scale to have a significant effect yet," he said.