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Mon 11 Oct 2010 10:57 AM

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UAE cenbank to launch Islamic CDs by year-end - StanChart

Certificates of deposit to help the Gulf state's Islamic banks to manage cash

UAE cenbank to launch Islamic CDs by year-end - StanChart
BANK SOURCE: Afaq Khan, chief exec of StanCharts Islamic banking unit, said test transactions could take place as early November (Getty Images)

The United Arab Emirates' central bank will launch Islamic certificates of
deposit by the end of the year to help the Gulf state's Islamic banks manage
cash, a senior banker at Standard Chartered Saadiq said on Monday.

Afaq Khan, chief executive of StanChart's Islamic banking unit, said test
transactions could take place as early November.

"It will be a tool to absorb the excess liquidity in the Islamic money
market," Khan said on the sidelines of an Islamic finance conference in
the UAE capital.

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.

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.

Islamic finance accounts for 16 percent of the UAE's banking assets,
compared to just 5 percent for Pakistan which already has a local currency
Islamic treasury in place, said Khan.

Standard Chartered Saadiq is one of the banks on a liquidity management
committee set up by the central bank this year. The group is also looking at an
Islamic repurchase facility.

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.

Initially, the CDs will be available only to fully Islamic banks and then
extended to the Islamic banking units of other commercial banks. (Reuters)