Launch of ‘Sharia Compliant’ Liquidity Facilities for Islamic Banking Institutions – Business & Finance


KARACHI: The State Bank of Pakistan (SBP) on Wednesday introduced Sharia-compliant liquidity facilities for the Islamic banking institutions for the first time to enable them to offer better yields and rates to their clients on deposits and loans.

SBP believed that the introduction of the aforementioned liquidity facilities will put the Islamic banking sector on par with its conventional counterparts and enable them to effectively manage their liquidity in the short term.

In line with the State Bank’s strategic plan to improve the liquidity management framework for the Islamic banking sector and enhance the effectiveness of monetary policy implementation, SBP introduced the permanent ceiling facility in accordance with Sharia law and open market operations (injections) for Islamic banking institutions (IBI).

As the size of the Islamic banking sector grows, SBP recognizes the need to introduce Sharia-compliant liquidity facilities for IBIs.

With the aim of bringing IBIs up to par with their traditional counterparts in terms of liquidity management channels, and improving SBP’s tools to manage market liquidity as part of its monetary policy objective, SBP has put in place the aforementioned facilities.

The structure and general characteristics of these facilities are as follows:

Sharia Compliant Services: SBP Enables IBWs to Fund All Kinds of Products

  1. The Shariah Compliant Permanent Ceiling Facility is a Mudarabah-based funding facility whereby SBP will provide day-to-day funding to IBIs against a Sharia compliant collateral. IBIs will place funds received from SBP in a special pool made up of high quality assets. The MFF will be offered at an “expected rate” – equivalent to the conventional overnight repo rate – based on a profit split ratio agreed between the SBP and IBI at the start of the transaction.

2.For Sharia-compliant open market operations (injections), the Mudarabah financing method will be used. It would be relevant to mention here that this open market operations facility (OMO) will currently be available for “injection”, ie the provision of liquidity only. Similar to conventional OMOs, SBP will conduct Sharia-compliant OMOs (injections) based on market liquidity conditions via a competitive multi-priced tenor bidding process as advertised by SBP of time to other, against guarantee. Once the expected rate of return is finalized through a bidding process, the funds provided by SBP will be invested in a pool of high quality assets by the respective IBI. SBP and IBI will agree on a profit split ratio at the start of the transaction.

The Islamic banking sector in Pakistan has consistently become an important component of the banking sector, registering remarkable growth over the past two decades. There are currently five (5) fully-fledged Islamic banks and seventeen (17) conventional banks operating with stand-alone Islamic bank branches offering a wide range of Sharia-compliant financial solutions. At the end of June 2021, the market share of Islamic banking sector assets and deposits in the entire banking sector was 17% and 18.7% respectively, and the branch network of Islamic banking institutions consisted of more than 3 583 branches and 1,562 counters.

This step would strengthen the financial intermediation of IBIs and allow them to offer better yields and rates to their clients on deposits and loans.

In addition, the introduction of the proposed facilities will also strengthen the monetary policy transmission mechanism and improve the efficiency of monetary policy implementation by the SBP to achieve the ultimate objective of price stability.

Copyright Business Recorder, 2021


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