The only two central banks in the Gulf with products that allow Islamic lenders to make short-term investments are expanding their offerings as demand for cash-management tools rises, according to a report by Bloomberg.
Bahrain’s central bank launched a seven-day Islamic deposit facility last month, and the United Arab Emirates (UAE) broadened the range of collateral that Shariah-compliant lenders can use for overnight lending as from April 1.
“You can’t ignore Islamic banks within the region and the central banks have to regulate these practices,” Hatim El Tahir, director of the Islamic finance group at Deloitte & Touche LLP, told Bloomberg. “Islamic banks have been calling for these tools.”
Regulators “need to ensure that Shariah-compliant banking isn’t left behind,” El Tahir added. “This will help the industry to grow in parallel with conventional counterparts.”
Forty years after Dubai Islamic Bank PJSC, the six-nation Gulf Cooperation Council’s (GCC) first Shariah-compliant lender, opened in the UAE, banks that comply with the religion’s ban on interest have fewer short-term liquidity-management tools than their conventional counterparts.
The UAE’s Shariah-compliant banks are growing more than twice as fast as conventional lenders, Ernst & Young LLP estimates, and Bahrain is home to the largest number of Islamic lenders in the region.
The UAE’s Islamic banking assets total US$100bn, the fourth-biggest in the world after Iran, Malaysia and Saudi Arabia, according to Dubai government data. Bahrain has US$43bn.
Bloomberg reports that Bahrain’s one-week facility is based on a wakalah contract, where the regulator invests cash on behalf of the lender. In the UAE, the central bank has expanded the list of eligible collateral for its Shariah-compliant overnight facility to include assets other than the regulator’s Islamic certificates of deposit.
“Liquidity management has been an issue for Islamic banks since they started,” says Dermot O’Reilly, a Dubai-based consultant at Amanie Advisors, an Islamic finance advisory company. “Conventional banks have this facility. It’s better for the Islamic banks to have more options when it comes to managing their liquidity.”
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