After months of conducting a feasibility study and engaging with central banks across the world, the Bank of England (BOE) has finally issued a consultation paper on establishing Islamic liquidity instruments to ease mounting pressure on UK Shariah banks in meeting the liquid asset buffer requirements as outlined by Basel III regulations.
Allowing local Islamic banks access to its balance sheet has been the goal of the BOE since the UK government made its bid to become the western hub of Islamic finance – a commitment sealed by its inaugural sovereign Sukuk in 2014; however, the regulator has been presented with several significant challenges in doing so. These include identifying Shariah compliant collateral to support financing facilities and the challenge of engineering a deposit account in compliance with Shariah without compromising the economic properties of interest-paying reserve accounts.
“The bank recognizes that Islamic banks are currently unable to use the bank's existing liquidity facilities. In particular, the Sterling Monetary Framework is the mechanism by which the bank sets interest rates, and interest-based facilities are not deemed Shariah compliant,” said the BOE. Presently, only Sukuk issued by the IDB (and the UK government) are eligible as a liquid assets buffer for Islamic banks and the Prudential Regulation Authority has proposed to widen the range of permissible assets to include Islamic bonds by top-rated sovereigns and lower-rated Shariah sovereign papers (subject to haircuts) as a buffer in line with Basel III requirements.
Despite the challenges, the apex bank has nonetheless consistently reassured the industry of its commitment to close this chasm, and is now seeking feedback on four proposed potential models covering both deposit products and insurance: a Wakalah fund-based arrangement and commodity Murabahah for deposits as well as a collateralized commodity Murahabah and Shariah compliant repurchase agreement (sale and buy back) mechanism for liquidity insurance.
Placing greater priority on creating a deposit facility over liquidity insurance (which could follow subject to further analysis), the regulator however noted trade-offs in selecting a suitable mechanism.
“In order to assess different Shariah compliant facility models for the facility, the bank has established a set of key criteria. Inevitably, there are likely to be trade-offs; it is unlikely that one model will consistently be the most effective at meeting all criteria. Fundamentally, what the bank is seeking to determine through this feasibility work is whether one (or more) of these models will meet these criteria to a sufficient degree for implementation,” it elaborated in a statement.
Should the central bank be successful in rolling out an Islamic deposit product, this would significantly support the liquidity needs of over 20 institutions offering Shariah compliant financial products in the UK and lower concentration risks in its Islamic financial industry.
Accepting feedback until the 29th April, the BOE will announce its decision on a feasible model later in the year.
The consultation document can be found at:
http://www.bankofengland.co.uk/markets/Pages/sterlingoperations/shariah-compliant-facilities.aspx
Source: IFN Daily Alert.
No comments:
Post a Comment