The Bank of England has published a consultation paper on establishing Shari’ah-compliant liquidity facilities. It says the paper presents the preliminary findings of the feasibility study it began in the second half of 2015, and seeks stakeholders’ views on the options identified.
In October 2013 the Governor stated that the Bank is ‘open for business,’ and a broad range of firms now has access to the Bank’s balance sheet. However, the Bank recognises that Islamic banks are currently unable to use its existing facilities. In particular, the Sterling Monetary Framework is the mechanism by which the Bank sets interest rates, and interest-based facilities are not deemed Shari’ah-compliant.
Following preliminary analysis, the Bank is now seeking stakeholders’ views on four potential models that could form the basis of future Shari’ah-compliant central bank facilities.
Two possible deposit facility models – which could help firms that cannot engage in interest-bearing activity to more flexibly meet and manage their liquid asset buffer requirements.
Two possible liquidity insurance models – which could provide liquidity to a solvent and viable firm that is unable to engage in interest-bearing activity, in the event of a liquidity stress.
Whilst the Bank is consulting on both types of model, its primary focus at this stage is to assess the feasibility of establishing Shari’ah-compliant deposit facilities. The Bank says it understands that this is the area of greatest demand, given that a more limited range of liquid market instruments is available to Islamic banks compared with other banks.
Views are sought from the UK Islamic banks in particular, but also from interested parties more generally. The deadline for responses is Friday April 29 2016. Following consultation and further analysis, the Bank says it will decide which model(s), if any, it considers feasible and is minded to implement.