Liquidity boost for Islamic banks as BB plans interbank market

Bangladesh Bank (BB) has initiated steps to launch an Islamic Interbank Money Market by June this year, aiming to improve liquidity management for Shariah-based banks.

At present, Islamic banks face difficulties during liquidity shortages as they are unable to participate in the conventional call money market used by traditional banks. The absence of a Shariah-compliant short-term funding mechanism often puts these institutions under financial strain.

The new marketplace is expected to provide an alternative financing avenue, making it easier for Islamic banks to trade short-term funds among themselves.

In designing the framework for this new market, the central bank has reportedly reviewed and analysed the successful models of Islamic interbank money markets in Indonesia, Malaysia, and Bahrain.

A senior BB official said there has been a lack of an effective interbank system for fund transfers specifically tailored for Islamic banks.

"Once the new market is operational, banks with surplus liquidity will be able to support those facing deficits. This will play a positive role in stabilising the liquidity situation within the Shariah-based banking sector," he said.

While the move has been welcomed, some industry experts emphasise that this is only a partial fix.

A former managing director of a private sector Islamic bank observed that while an interbank system is helpful for managing short-term liquidity gaps, it is not a solution for long-term structural issues.

He stressed that the central bank must maintain strict monitoring over the fund management of these banks to ensure lasting stability.

The introduction of this dedicated money market is seen as a crucial step in modernising Bangladesh’s Islamic banking sector, which currently holds a substantial share of the country's total banking assets, reports UNB.