KARACHI: The State Bank of Pakistan (SBP) has introduced a Shariah-compliant standing ceiling facility and open market operations (injections) for the Islamic banking institutions (IBIs), a statement said.

As the size of the Islamic banking industry is increasing, the central bank recognises the need to introduce Shariah-compliant liquidity facilities for IBIs.

With a view to bring IBIs at par vis-à-vis their conventional counterparts in terms of liquidity management avenues, and to enhance the SBP’s tools for managing the market’s liquidity as part of its monetary policy objective, the State Bank has introduced the aforementioned facilities.

The structure and broad features of these facilities are as follow

Shariah-compliant standing ceiling facility is a Mudarabah-based financing facility; whereby, the SBP will provide financing to IBIs on an overnight basis against the Shariah-compliant collateral.

IBIs would place the funds received from the central bank in a special pool consisting of high quality assets. The Mudarabah-based financing facility will be offered at an ‘expected rate’, equivalent to the conventional overnight reverse repo rate, based on a profit sharing ratio agreed between the SBP and IBI at the onset of the transaction.

For the Shariah-compliant open market operations (injections), Mudarabah mode of financing will be used. This open market operations (OMO) facility will currently be available for ‘injection’ i.e., provision of liquidity purposes only.

Similar to the conventional OMOs, the SBP will be conducting Shariah-compliant OMOs (injections) based on market liquidity conditions through a multiple price competitive bidding process for tenors as announced by the SBP from time-to-time, against collateral.

Once the expected rate of return is finalised through a competitive bidding process, the funds provided by the central bank would be invested in a pool of high quality assets by the respective IBI.

The SBP and IBI would agree to a profit sharing ratio at the onset of the transaction.

The Islamic banking industry in Pakistan has become systemically an important component of the banking industry, registering a remarkable growth over the last two decades. Currently, there are five full-fledged Islamic banks and 17 conventional banks operating with the standalone Islamic banking branches offering a wide array of Shariah-compliant financial solutions.

At the end of June 2021, the market share of the Islamic banking industry assets and deposits in the overall banking sector stood at 17 per cent and 18.7 per cent, respectively, and the branch network of the Islamic banking institutions comprised over 3,583 branches and 1,562 windows.

The introduction of aforesaid liquidity facilities will bring the Islamic Banking industry at par with their conventional counterparts and enable them to effectively manage their short-term liquidity.

This would strengthen the financial intermediation by IBIs and enable them to offer better returns and rates to their customers on deposits and loans.

Further, the introduction of proposed facilities will also strengthen the monetary policy transmission mechanism and enhance the effectiveness of the monetary policy implementation by the SBP to achieve the ultimate objective of price stability.

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