Bank of England to Launch First Western Islamic Deposit Facility in 2021

The announcement of this instrument has had a lot of echo in the world of Islamic finance, as it is the very first liquidity management tool provided by a Western central bank, in accordance with Islamic rules. Until now, British Islamic banks have been at a disadvantage compared to their conventional counterparts, with a large space of high-quality liquidity management assets, whether securities issued by companies or states, reports Saphirnews.

Moreover, the prohibition for Islamic banks to pay or receive interest has forced British Islamic banks to maintain significant non-remunerated reserves and to limit their short-term deposit offerings. But this situation had helped them withstand the 2008 global financial crisis.

However, British Islamic banks are unable to comply with the recent prudential rules of the Basel III agreements. Thus, the new instrument will allow the British Islamic finance sector to be on par with the rest of the market and offer British Islamic banks greater flexibility, the Bank of England said.

Since 2015, the Bank of England has studied the operational and technological aspects of creating a deposit facility that meets Islamic requirements. Before launching this instrument, the Bank of England will complete the legal documentation, conduct operational testing, and begin the process of integrating interested banks. Furthermore, the fundamental principles of Islamic finance were well placed to address some of the challenges England will face in order to revive its economy after the health crisis, Andrew Hauser stressed.