Emirates Business 24-7, 30 June 2010

A big portion of certificates of deposits (CDs) issued by the Central Bank is held by Islamic banks which are better placed than conventional banks on the liquidity front.

Though the total CDs with the Central Bank as at end-March 2010 amount to Dh68.5 billion, more than Dh20bn are held by Islamic banks which do not stand to get paid against that as Islamic banks do not accept interest.

"On the one hand, the Islamic banks keep their funds with the Central Bank for zero interest, on the other, Islamic banks cannot fall back on the liquidity facility offered by the Central Bank as this also involves interest," an expert explained.

However, both these issues are addressed by a committee set up by the Central Bank and where all Islamic banks are members.

Though all banks in the UAE are regulated by the Central Bank, the systems in place are mostly tailored for conventional banks only.

There were reports that the Central Bank was working on an Islamic CD which will work on the lines of Murabaha based on the principles of profit.

Already Islamic banks are present in the inter-bank market along with conventional banks.

"We have our own instruments to do the inter-bank financing and the introduction of Islamic CDs and Islamic liquidity window will help the Islamic banks go a long way in the modern banking," said a top official of an Islamic bank.

In the absence of a Shariah liquidity facility, Islamic banks have not been able to tap the liquidity support window opened by the Central Bank following the liquidity crunch ushered in by the recession.

While the loans to bank against CDs amounted to only Dh2.266bn as at 2009 end, the Central Bank's liquidity support facility to the banks fell from Dh4.55bn to Dh2.36bn at the end of 2009.

By CL Jose

© Emirates Business 24/7 2010