A review of the long history leading up to the Bank of England accepting Shariah compliant deposits from banks.
Posted 1 May 2022
I regularly point out that achieving change takes persistence and more time than you originally expect.
My March column in the magazine "Islamic Finance News" covered another example, by reviewing the history leading up to the Bank of England launching its "Alternative Liquidity Facility." You can read it below.
This is an important development, as it makes it much easier for UK Islamic financial institutions to manage their liquidity requirements.
I was very pleased to see the article “Bank of England debuts much-awaited alternative liquidity facility for UK Islamic banks” in the 8 December 2021 issue of Islamic Finance News.
For many years Islamic financial institutions in the UK have been pointing out that the absence of highly liquid, virtually risk free, short maturity, sterling denominated financial assets has made managing their treasury operations much more difficult. That has been particularly problematical because modern bank regulations require all banks to hold significant amounts of liquid risk-free assets.
The launch of the facility in December 2021 is another demonstration of the fact that achieving change always takes much longer than most might expect.
I raised the need for a liquidity facility as long ago as the 4 July 2012 issue of Islamic Finance News when responding the following question which IFN posed to its Islamic finance experts panel:
“What are the challenges that still exist among Islamic banks in relation to their treasury requirements and what should be done to further its development?”
Six years ago, my 9 March 2016 IFN column mentioned the February 2016 Bank of England consultation paper about such a liquidity facility. I subsequently responded to the consultation.
My 10 May 2017 IFN column reported that the Bank of England had issued a second consultation document in April 2017, to which I also responded. The consultation paper issued at that time, which is still available from the Bank of England website page “Shari’ah compliant liquidity facilities: establishing a fund based deposit facility” explains the wakalah based fund structure the Bank of England had in mind.
The Bank of England’s Quarterly Bulletin for 2017 Q3 contained a very informative article “Islamic banks and central banking” by Arshadur Rahman of the Bank’s Sterling Markets Division. It explained in excellent detail both the background issues summarised in my IFN columns and the detailed operations of the structure the Bank of England had in mind.
In particular the article pointed out that it had become easier to address the foreign exchange risks arising from the fact that virtually all of the suitable sukuk to hold in the structure were not sterling denominated: “It would be possible to hedge FX risk in the portfolio using Shari’ah compliant hedging instruments, the contractual terms of which have become increasingly more standardised over recent years.” See also my 13 July 2016 IFN column about the International Islamic Financial Market’s Shariah compliant forward contracts.
When it launched the alternative liquidity facility, the Bank of England also published 22 pages of “Terms and Conditions for Participation in the Bank of England’s Alternative Liquidity Facility.” When you read these, it is quite clear that the arrangement is based on wakalah, as presaged in the consultation papers and Arshadur Rahman’s article.
However, consistent with longstanding UK Government policy, the term “wakalah” or “Islamic” appear nowhere in the terms and conditions document. As always, the text only uses standard English terminology, and religious language or issues are never mentioned. That has been the approach of the Government for over 20 years, with commendable consistency.
Finally, the alternative liquidity facility only tackles one side of the balance sheet. What the Bank of England now needs to devise are Shariah compliant arrangements to enable it to make “lender of last resort” loans to Islamic banks. That challenge has been deferred for the last six years!
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.
Follow @Mohammed_Amin