TDS Desk:

Bangladesh Bank has studied international practices to design the initiative, focusing on how Islamic interbank money markets operate in countries such as Indonesia, Malaysia, and Bahrain

Bangladesh Bank has announced plans to launch an “Interbank Islamic Money Market” for Shariah-compliant banks, with the system expected to be operational by June this year.

Currently, when Islamic banks face liquidity pressures they cannot borrow funds through conventional call money channels like other banks. This often places them under financial strain. The new market will provide an alternative financing platform for Islamic banks and ease liquidity management.

Bangladesh Bank has studied international practices to design the initiative, focusing on how Islamic interbank money markets operate in countries such as Indonesia, Malaysia, and Bahrain. The central bank has also consulted with counterparts in these countries.

According to the plan, the interbank system will support transactions with tenures of 1, 7, 14, 28, 90, and 180 days. Borrowing will be allowed in both collateralised and non-collateralised formats.

It is notable that despite introducing a interbank arrangement for Islamic banks in 2011, there was no implementation. The idea for an Islamic interbank market was first proposed during the tenure of former central bank governor Ahsan H Mansur.

The new initiative aims to strengthen the liquidity of Islamic banks across the country.

Expert perspectives

Former managing director of Bank Asia Arfan Ali noted, “Islamic banks previously had no interbank mechanism. They were often forced to borrow going outside the shariah sources. Once an interbank system is operational, these banks will be able to transfer funds among themselves, which is definitely a positive development.”

He added that banks with surplus funds can lend to others, helping address temporary liquidity shortages. Currently, Islamic banks sometimes borrow from other banks or even receive special support from Bangladesh Bank due to the absence of dedicated instruments. He expects the new system to significantly improve liquidity management for Islamic banks.

A senior official of a Shariah-based bank explained that when Islamic banks face liquidity shortfalls, they cannot borrow from conventional banks, nor can they use Bangladesh Bank’s repo facility like conventional banks. They can only borrow through Islamic sukuk, which is limited compared to actual demand.

A former managing director of a private Islamic bank in the country has said that introducing an interbank money market for Islamic banks would not be a long-term solution.

He stated that Islamic banks where funds have been misappropriated cannot manage a liquidity crisis simply through an interbank system, because the interbank mechanism only addresses short-term crises. It cannot manage long-term crises. Using it to deal with long-term crises would backfire—it’s a very simple calculation.

He added that even if these banks borrow money from the interbank market, the central bank needs to monitor whether the borrowed funds are being managed properly in these Shariah-compliant banks.

Current liquidity support mechanisms

1. Islamic banks and Shariah-compliant branches of conventional banks can obtain liquidity support from Bangladesh Bank’s Islami Bank Liquidity Facility (IBLF) by using sukuk as collateral. This support is only available from the central bank.
2. Islamic banks can also access liquidity from the Bangladesh Government Islamic Investment Bond (BGIIB). Surplus funds from other banks are deposited into this fund, which provides temporary liquidity with loans terms being three or six months. However, the fund is currently inactive.
3. Islamic banks manage deposits among themselves under mudaraba agreements, providing profit rates. When a bank faces cash shortages, it borrows from other Islamic banks to cover shortfalls.

A senior Bangladesh Bank official said an interbank market will provide Islamic banks with an organised platform to manage liquidity crises, similar to conventional banks. While the central bank will not intervene directly, it will monitor the market to gauge liquidity demand and supply.

Benefits of interbank system

The interbank market will allow Shariah-compliant banks to transact with one another and with conventional banks that operate Islamic windows. Banks facing temporary liquidity shortages can borrow from other Islamic banks on trust-based arrangements, typically without collateral.

A managing director of an Islamic bank told that, “This system will increase flexibility in fund transfers among Islamic banks. Short-term fund management can be done without depending solely on the central bank. If a bank’s current account goes negative, it can borrow overnight from another Islamic bank to maintain liquidity, increasing operational options.”

However, a senior Bangladesh Bank official cautioned that newly merged banks may face initial challenges in borrowing through the interbank market, as counterparties may be uncertain about lending to a newly formed entity with low core income and high liabilities.

The merged bank has no income from its assets, incurs interest expenses but has no interest income. Additionally, the core income margin is very low, and commission income is also minimal because it cannot currently issue bonds. Furthermore, there are several other complexities, as the bank has high claims and, accordingly, no significant income.

However, a senior Bangladesh Bank official cautioned that newly merged banks may face initial challenges in borrowing through the interbank market, as counterparties may be uncertain about lending to a newly formed entity with low core income and high liabilities.

The merged bank has no income from its assets, incurs interest expenses but has no interest income. Additionally, the core income margin is very low, and commission income is also minimal because it cannot currently issue bonds. Furthermore, there are several other complexities, as the bank has high claims and, accordingly, no significant income.