SBP introduces liquidity facilities for IBIs

Facilities to bring Islamic banking institutions at par with conventional counterparts

KARACHI:

The State Bank of Pakistan (SBP) has introduced a Shariah-compliant standing ceiling facility and open market operations (injections) for Islamic banking institutions (IBIs).

It is in line with the central bank’s strategic plan to improve the liquidity management framework for the Islamic banking industry and enhance the effectiveness of monetary policy implementation, according to a statement issued by the SBP on Wednesday.

“As the size of the Islamic banking industry is increasing, SBP recognises the need to introduce Shariah-compliant liquidity facilities for IBIs,” the statement said.

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

The Shariah-compliant standing ceiling facility is a Mudarabah-based financing facility (MFF) whereby the SBP will provide financing to IBIs on an overnight basis against Shariah-compliant collateral, the statement said.

“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 the conventional overnight reverse repo rate – based on a profit-sharing ratio agreed between the SBP and IBI at the onset of the transaction, the statement added.

For Shariah-compliant open market operations (injections), the Mudarabah mode of financing will be used.

This open market operations (OMOs) facility will currently be available for injection, ie provision of liquidity, purposes only.

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

“Once the expected rate of return is finalised through a competitive bidding process, the funds provided by SBP shall be invested in a pool of high quality assets by the respective IBI,” said the statement.

Published in The Express Tribune, December 30^th, 2021.

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