Union of Arab Banks (UAB) is close to finalising a plan to facilitate Islamic banks to approach Central Banks for liquidity support, said to a top UAB official.

Chairman Adnan Ahmed Yousif said the project is at an advanced stage and Islamic Development Bank (IDB) will soon take up this issue with authorities. Currently, Islamic banks are unable to use the liquidity schemes made available by the Central Banks as Sharia laws do not allow them to deal with interest.

"Central Banks use the discount rate to offer short-term funding to banks and this cannot be paid by Islamic banks as per the Shairah norms.

"Islamic banks also cannot accept interest offered by Central Bank for their excess funds parked with Central Bank," Ahmed Yousif said.

Talking to Emirates Business, he also called upon the GCC banks to add more convertibles as component of their equity.

"It has been noticed that the GCC banks are averse to convertibles and tend to rely mostly on common shares. This is wrong. The equity elements should be wide-based and include more instruments such as preference shares," he said.

By CL Jose

© Emirates Business 24/7 2010