Bangladesh Bank has planned to introduce interest-free ‘special liquidity support’ for Shariah-based banks amid a severe liquidity shortage.
The liquidity support would be extended to Islamic banks against ‘Shariah-based Special Bond’ issued to fulfil the government’s payment commitments, BB officials said.
The nature of this support is proposed to be charitable, as the BB will not charge any interest for the funding in alignment with Islamic finance principles, according to a working paper prepared by relevant departments.
According to BB officials, the government, facing a liquidity shortage and lacking adequate funds to fulfil its payment obligations, has turned to issuing bonds through the central bank, which is effectively printing money.
The central bank will frame a policy in this regard soon, BB officials said.
The proposed bonds, with potential tenures of 90 and 180 days, will be structured as callable instruments, allowing the government to withdraw the bond from the market before maturity upon repayment of the principal amount, according to the working paper.
On January 17, the finance ministry issued a notification to issue an interest-free ‘Shariah-based Special Bond’ worth Tk 2,482 crore in favour of Islami Bank Bangladesh PLC to settle the government’s outstanding loan payments to private fertiliser importers, it said.
The Bangladesh Bank issued this bond to Islami Bank Bangladesh in the form of a promissory note, which can be used as part of the bank’s Statutory Liquidity Ratio (SLR) requirements, it said.
Under this arrangement, the Bangladesh Bank can extend interest-free loans to Islamic banks, using these bonds as collateral, according to the working paper.
The BB’s move came at a time when a number of Shariah-based banks were struggling with a severe liquidity crisis.
As of January 18, the total current account deficit for five Islami banks stood at nearly Tk 14,000 crore, indicating that substantial support has already been provided by Bangladesh Bank to sustain their day-to-day operations.
The negative balance in the current account of First Security Islami Bank was Tk 7,400 crore, Islami Bank Bangladesh Tk 3,500 crore, Social Islami Bank Tk 1,900 crore, Union Bank Tk 1,100 crore, and Global Islami Bank Tk 70 crore.
BB officials said that the funding may be adjusted in the negative current account balance of the bondholders.
However, the BB should get consent from its board of directors for extending such a facility, the paper read.
Additionally, the central bank may impose a 5 per cent haircut on the face value of the Shariah-based Special Bond, with the remainder provided to the banks, it said.
The term haircut refers to a reduction applied to the value of the bond.
This facility would be limited to settling the government’s outstanding payments to fertiliser and electricity importers as of June 30, 2023, it said.
The BB may open an ‘SLS Qard Account’ for special liquidity support within its core banking system for fund management purposes, the working paper reads.
Upon maturity, the bonds used as collateral will be released from lien, and the SLS amount will be debited from the bank’s current account with Bangladesh Bank and credited to the ‘SLS Qard Account’, it said.
Any early withdrawal of the bonds through a call option will result in an adjustment to the bank’s current account balance, it said.
New Age