Bank of England proposes 'fund-based' sharia-compliant liquidity facility

Out-Law News | 10 Apr 2017 | 3:13 pm | 1 min. read

The Bank of England is proposing to introduce a 'fund-based' deposit facility for Islamic banks, which would allow them to obtain access to additional liquidity when necessary in a way that is compliant with sharia law.

Its proposal, which is based on an agency contract known as 'wakala', is one of two options put forward by the bank in a consultation paper last year. It has decided against an alternative model, based on commodity 'murabaha' trading, after consultation respondents warned of potential reputational risks.

A new consultation, which closes on 23 May 2017, provides more technical detail of how an updated version of the wakala model would work in practice. However, the facility is unlikely to be in place before spring 2018, according to the bank.

In a statement, the Bank of England said that the plans were "part of the bank's more general approach to broadening market access to central bank liquidity facilities".

"The bank recognises that Islamic banks are currently unable to use the bank's existing facilities because they involve interest, which is not deemed sharia compliant," it said.

It will consider introducing a liquidity insurance facility at a later date once the deposit facility is operational, subject to resource requirements, it said.

Islamic banks are currently prevented from accessing the Bank of England's liquidity facilities, which are governed by the Sterling Monetary Framework, due to the ban on interest, or 'riba', under sharia law. Islamic financial products are structured in a very different way to western products in order to comply with sharia principles, such as the ban in allowing one party to make money unjustly at another's expense.

The UK currently has five standalone Islamic banks that are regulated by the Prudential Regulation Authority (PRA), plus a further 20 firms that offer sharia-compliant products as part of their wider product offering. The UK also has sharia-compliant securities, or 'sukuk', listed on the London Stock Exchange, and is home to a number of sharia-compliant insurance companies, asset managers and advisory firms.

The Bank of England will begin work to integrate its planned facility into its existing systems and processes, and to create standardised terms and contractual documentation, once the consultation closes. It will publish more details, including a formal timeline, "in due course", according to the consultation.