Islamic banks show interest in SBP’s discount facility

Published: July 28, 2011

Institutions preparing proposals which will be sent to SBP, finance ministry.

KARACHI: 

Islamic banks have started preparing recommendations in the light of Shariah principles to take benefit of discounting facility of the State Bank of Pakistan (SBP) and proposals will be sent to the central bank and finance ministry.

Commercial banks borrow from the discount window of SBP for a three-day period to address their cash constraints. This facility is called discounting and the borrowing rate is called discount rate.

The use of discount window as a ‘lender of last resort’ is not permitted in the Islamic banking system, however, this facility can prove to be valuable for Islamic banks which are becoming increasingly popular.

Bank Islami Shariah Adviser Irshad Ahmed Aijaz told The Express Tribune that Pakistan Banks Association’s committee for Islamic banking had started preparing recommendations so that Islamic banks could approach the SBP’s discount window. He said all Islamic banks were jointly working on this project and held a meeting last month, adding Islamic banks could benefit from the facility by creating partnership with SBP.

He said though Islamic banks had not felt the need for this facility because of their strong deposit base, keeping in view the increasing popularity of Islamic banking, preplanning was necessary.

He said banking laws applicable in Pakistan were not in accordance with the Islamic banking system. In case of any dispute between an Islamic bank and its customer, cases in the banking court were decided under the banking ordinance, which did not define Islamic banking system.

Published in The Express Tribune, July 28th, 2011.

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