Bahrain's central bank said on Wednesday an Islamic liquidity tool it introduced late last year was not being used by banks, indicating Islamic lenders had sufficient short-term liquidity.

As part of measures to stabilise money markets, Bahrain in November expanded acceptable collateral for overnight funds to include ijara sukuk, a type of Islamic bond.

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.

"We created this should any reason arise, if there is a shortage of liquidity," said Ahmed Buhijji, director of banking services at the central bank.

No bank has called upon the facility yet as Islamic banks in Bahrain do not suffer from liquidity problems, he said.

Islamic bonds, or sukuk, are structured as profit-sharing or rental agreements, and their returns are derived from underlying physical assets such as real estate or commodities. The broadly used ijara form is based on a lease and buy-back of an asset.

Liquidity tools and the creation of an Islamic money market are seen crucial for the nascent Islamic finance industry to continue its growth.
The lack of a strong secondary market for sukuk partly limits the availability of collateral for the Islamic liquidity tool.

Bahrain's central bank issues 5 million dinars ($13.27 million) of short-term ijara sukuk every month on behalf of the Bahraini government, as well as medium- and long-term sukuk.

"What we are seeing right now, the government issues ijara sukuk, and who participates takes that issue and keeps it and doesn't trade it," Buhijji said. - Reuters