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UAE Central Bank plans Shariah-compliant CDs

Haseeb Haider / 12 October 2010

ABU DHABI — The UAE’s Central Bank, in a bid to widen investment options for Islamic lenders, will introduce Shariah-compliant certificates of deposit, or CDs, by year-end.

According to experts, the central bank initiative “will help banks manage liquidity.” Initially, the CDs will be available only to fully Islamic banks and then extended to the Islamic banking units of other commercial banks.

“Test transactions could take place as early in November,” Standard Chartered Saadiq Chief Executive Officer Afaq Khan said in Abu Dhabi on Monday.

The Shariah-compliant instrument, on the lines of Islamic Murabahah transaction will help soak up the excess liquidity in the Islamic money market, he told reporters on the sidelines of an International Islamic Finance Forum being held in the capital.

A banker welcoming the move told Khaleej Times that Islamic banks with this offering can invest their surplus liquidity in Shariah-compliant certificates of deposit which will also offer them financial gains.

Earlier, they could only buy the interest bearing certificates of deposit, which is against the principles of Islamic finance, he said.

He said that Islamic banks in the country will be able to effectively manage their short term liquidity positions, which has been a challenge.

Malaysia, the world’s biggest market for Islamic bonds, Bahrain and Indonesia sell bills to help soak up cash in the financial system and set benchmarks for short-term bond sales. A Murabahah transaction is a sale and deferred-payment agreement based on an asset in which the cost and profit margin are pre-agreed between a bank and its customer. Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles.

Islamic finance accounts for 16 per cent of the UAE’s banking assets, compared to just five per cent 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 global Islamic banking industry has been forecast to touch $2 trillion in the next five to seven years from the current $1 trillion. This growth can be achieved with a strong focus on ethical banking values, where Islamic banks can lead the way. These statements were echoed by industry experts at the International Islamic Finance Forum Abu Dhabi.

As the region’s Islamic banks increasingly demonstrate a renewed emphasis on the basic principle of good relations with clients driven by friendly and efficient customer service, this “ethics and values” themed-industry gathering is a timely opportunity for top tier Islamic financiers to get together to debate a range of critical industry issues.


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