Bank of England plans liquidity tool for Islamic banks

(Reuters) - The Bank of England said on Thursday it will develop a sharia-compliant liquidity tool for use by Islamic banks, underscoring efforts to attract business from the industry’s core centres in the Middle East and South East Asia.

The Bank of England is seen in the City of London, Britain, February 14, 2017. REUTERS/Hannah McKay

London has long sought to position itself as a global hub for Islamic finance, going as far as issuing a sovereign Islamic bond in 2014, and tools to support its Islamic banking sector could help weather the economic impact of leaving the European Union.

The central bank has issued a consultation paper on a fund-based deposit model for the facility, which would help Islamic lenders meet regulatory requirements for liquid asset buffers.

Islamic finance follows religious principles such as bans on gambling and outright speculation, with interest-bearing products deemed off-limits.

This means Islamic banks can find it difficult to access the money markets, and in particular, the interest-based liquidity tools offered by central banks.

The BoE said the facility is unlikely to be ready before the spring of 2018, while it has yet to decide on whether it will develop a liquidity insurance facility.

However, the proposed tool would be a welcome development for Britain’s Islamic banks.

These include Gatehouse Bank, the Bank of London and the Middle East BLME.DI, Qatari-owned Al Rayan Bank and a unit of Qatar Islamic Bank QISB.QA.

The pricing of the proposed model would be comparable with conventional tools, making it attractive for Islamic banks, the BoE said in its consultation paper.

The central bank said feedback from a previous consultation paper found preference for a model using an agency contract known as ‘wakala’.

Respondents advised the central bank that another proposed model based on commodity ‘murabaha’, a cost-plus-profit arrangement, could pose reputational risks because opinions on its sharia-compliance can vary.

Stakeholders have until May 23 to give their views, after which the Bank of England would begin work on the facility, including a set of standardised terms and contractual documentation.

Editing by Sherry Jacob-Phillips