Bank of England may broaden Islamic liquidity tools

Reuters

By Bernardo Vizcaino

March 26 (Reuters) - The Bank of England is studying ways toincrease the number of sharia-compliant assets that Islamicfinancial institutions can use in their liquidity buffers, astep towards reducing concentration risks in the sector.

The move comes as part of a broader push to promote Londonas a top centre for Islamic finance, in the face of growingcompetition from other centres such as Dubai and Kuala Lumpur.

Currently, sukuk (Islamic bonds) issued by the AAA-ratedIslamic Development Bank are the only assets thatmeet the central bank's criteria for use in the liquiditybuffers of the 22 Islamic financial institutions operating inBritain.

These include six full-fledged Islamic banks such as theEuropean Islamic Investment Bank, Bank of London andthe Middle East and Gatehouse Bank.

In addition to reducing risks, expanding the eligible listcould improve growth prospects for the industry and remove apotential entry barrier to the sector, a consultation paperreleased by the central bank said.

"Recognising only one asset also potentially limits thegrowth of existing sharia-compliant firms and creates barriersto entry for new sharia-compliant firms due to the difficultiesthat can be experienced obtaining the asset."

Islamic finance follows religious principles such as bans oninterest and pure monetary speculation; this limits the types offinancial tools that banks can use to manage their short-termfunding needs.

The Bank of England's proposal is in line with the approachof Basel III global banking regulations, which allow sukukissued by high-rated sovereigns to be included in the liquidassets buffer without a haircut.

This would allow Britain's proposed 200 million pound ($330million) sovereign sukuk issue to be used, as well as otherhigh-investment grade instruments such as sukuk issued by theMalaysia-based International Islamic Liquidity Management Corp.

Sukuk issued by sovereigns with lower credit ratings andother non-financial issuers could also be eligible, subject tohaircuts and caps, the consultation paper said. The consultationwill end on April 15 but no date was given for the proposedreform.

Britain first announced plans for a sovereign sukuk issuesix years ago but that issue never materialised as the country'sDebt Management Office decided the structure was too expensive.

The new proposal is less than a fifth of the size of theoriginal, and is designed to boost London's status rather thanto diversify Britain's investor base to a significant degree. (Editing by Andrew Torchia)

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