Islamic banking institutions ‘Shariah-compliant’ liquidity facilities launched


The State Bank of Pakistan (SBP) for the first time has introduced Shariah Compliant Liquidity Facilities for Islamic Banking Institutions to enable them to offer better returns and rates to their customers on deposits and loans.

SBP believed that introduction of afore said liquidity facilities will bring Islamic Banking industry at par with their conventional counterparts and enable them to effectively manage their short-term liquidity.

In line with State Bank’s strategic plan to improve Liquidity Management Framework for Islamic Banking Industry and enhance the effectiveness of monetary policy implementation, SBP has introduced Shariah Compliant Standing Ceiling Facility and Open Market Operations (injections) for Islamic Banking Institutions (IBIs).

As the size of the Islamic banking industry is increasing, SBP recognizes the need to introduce Shariah compliant liquidity facilities for IBIs.

With a view to bring IBIs at par vis-à-vis their conventional counterparts in terms of liquidity management avenues, and to enhance SBP’s tools for managing market’s liquidity as part of its monetary policy objective, SBP has introduced the aforementioned facilities.

The structure and broad features of these facilities are as under:

Shariah Compliant Standing Ceiling Facility is a Mudarabah based Financing Facility (MFF) whereby SBP will provide financing to IBIs on an overnight basis against Shariah compliant collateral. IBIs shall place the funds received from SBP in a special pool consisting of high quality assets. The MFF will be offered at an ‘Expected Rate’-equivalent to conventional overnight reverse repo rate – based on a Profit Sharing Ratio agreed between the SBP and IBI at the onset of the transaction.

For Shariah Compliant Open Market Operations (Injections), Mudarabah mode of financing will be used.

It would be pertinent to mention here that this open market operations (OMO) facility will currently be available for ‘injection’ i.e. provision of liquidity purposes only.

Similar to conventional OMOs, SBP will be conducting Shariah Compliant OMOs (Injections) based on market liquidity conditions through a multiple price competitive bidding process for tenors as announced by SBP from time to time, against collateral.

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