UAE's central bank plans to launch new liquidity facilities within the next three months to expand its policy arsenal and help the Gulf state's Islamic banks manage cash, a senior official said on Wednesday.
Speaking to Reuters, Mohamed al Tamimi, deputy executive director at the central bank's treasury department, said: "I believe that we are the first central bank in the region to issue Islamic certificates of deposit with maturities of one week up to one year."
A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, which has close to $1 trillion worth of assets globally.
Tamimi said: "This instrument will be one of the central bank's monetary policy tools in the future." He also chairs the Islamic liquidity management committee set up by the OPEC member's central bank.
The move will make liquidity management more effective for the UAE's Islamic banks, which now lack access to the central bank as using conventional CD auctions is not in line with sharia, or the Islamic law.
Tamini said: "This step will help Islamic banks and Islamic banking units within conventional banks to manage their liquidity as one of the main problems for them is the shortage of sharia compliant instruments for short term liquidity management."
The UAE central bank's monetary policy is limited by its dirham peg to the US dollar. It uses CDs auctions and repurchase facilities among other tools to regulate liquidity in the banking system.
Tamimi said the new Islamic CDs will be sharia compliant, based on a commodity murabaha concept and will be offered in daily auctions.
Under a commodity murabaha deal, an Islamic bank makes a profit on difference between buying and selling any commodities except for gold and silver. This allows them to avoid charging interest, which the religion forbids.
He said: "After the issuance of Islamic CDs the central bank will offer repo facilities for these CDs to support their liquidity."
Tamimi added: "We expect that the issuance of Islamic CDs and repo facilities will be completed within coming three months."
There are eight fully fledged Islamic banks operating within the UAE, although most banks in the federation have an Islamic window alongside their conventional operations. The country's Islamic assets stood at $84 billion in 2009.
In fellow Gulf Arab state, Bahrain, the central bank expanded in November 2008 acceptable collateral for overnight funds to include ijara sukuk, a type of Islamic bond, as part of measures to stabilise money markets.
The instrument, which functions in a similar way to an overnight repurchase facility, allows Islamic banks to borrow funds against sukuk issued by Bahrain's government as collateral. (Reuters)