Islamic banks have an extra instrument for managing liquidity thanks to a new Central Bank facility.
Launch of Sharia facility in UAE set to boost Islamic investment
Islamic banks are likely to boost their Dh15 billion (US$4bn) of investments in Central Bank certificates of deposit after the launch of a new Sharia-compliant repurchase facility, said a senior bank official.
The facility, which is aimed at developing liquidity management in the Islamic banking system, allows banks to borrow money in accordance with Sharia principles.
In exchange, the facility accepts the Central Bank's Islamic certificates of deposit as collateral.
"The objective is to create an instrument where banks can invest in and get liquidity from. By providing this facility it might encourage holdings of Islamic certificates of deposit," said Saif Al Shamsi, the senior executive director of the Central Bank's treasury department.
A shortage of devices for managing liquidity is cited by analysts as a constraint to the faster expansion of the Islamic finance industry globally. The introduction of the facility last week follows the Central Bank launching auctions of Islamic certificates of deposit in November. Banks already hold Dh15bn of the certificates, said Mr Al Shamsi.
Repurchase agreements, also known as repos, are common tools used by central banks to inject liquidity into the financial system. Central banks buy securities from a bank with cash on the condition that the bank will repurchase them at a set time for a specified price.
The UAE facility differs slightly in order to meet Islamic requirements banning interest payments. It involves a bank appointing the Central Bank as an agent to buy a commodity from an independent supplier, before then selling it to the regulator on an agreed date for a set price plus profit.
Until now, the Central Bank has operated only a conventional repo facility, which lenders have used to boost their liquidity.
Although the UAE Islamic banking system is small compared with the conventional industry, it is growing.
As of the end of last year, the country's eight Islamic banks held assets of Dh269bn, 17 per cent of the assets of the total banking system.