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28 March 2024

Central Bank braces for first Islamic CDs

The UAE Central Bank says the new CDs will be issued on the basis of Murabaha, which is widely practised by Islamic banks. (FILE)

Published
By Staff

The Central Bank has told banks operating in the UAE it is pushing ahead with landmark plans to issue the country’s first official Shariah-compliant certificates of deposits (CDs) and urged them to invest in such tools.

Central Bank Governor Sultan bin Nasser Al Suwaidi said the new CDs would be issued on the basis of Murabaha, which is widely practised by Islamic banks.

In a circular released on Thursday, Suwaidi said UAE-based Islamic banks wishing to participate in the programme would be required to sign a Commodity Murabahah Deposit Master Agreement with the Central Bank and to install Shariah-compliant CDs auction system.

“We wish to take this opportunity to thank all Islamic banks for the feedback given and cooperation rendered through their participation in the Islamic Liquidity Management Committee (ILMC). Their efforts and contributions are greatly appreciated in developing this product,” he said.

Terms of the new CDS showed they would be issued in dirham, US dollar and euro and their maturity date would range between one week and five years.

In press comments last week, a senior Central Bank official said such CDs are intended to absorb excess liquidity in Islamic banks in the country and allow them to invest such liquidity in dirham in the local market “instead of turning abroad to invest in foreign currency”.

Saif Hadef Al Shamsi, Executive Director at the Treasury Department, said the Central Bank expects to raise Dh10 billion within a year of offering Islamic CDs, which are unlikely to be based on interest as it is prohibited in Islam on the grounds it amounts to usury.

Like other regional banks, Islamic banks in the UAE have been affected by the global fiscal crisis, project downturn and default problems in the region.

In the first half of 2010, the UAE-based Islamic banks recorded a decline of around 17 per cent in their net earnings, according to their balance sheets. From Dh1.51 billion in the first half of 2009, the combined net income of the country’s Islamic banks dipped to nearly Dh1.24bn in the first half of 2010.

The earnings in the first half of this year accounted for nearly 13.4 per cent of the total net profits of the UAE’s banking sector, the report said. Their combined net income shrank despite a surge in the profits of the Abu Dhabi Islamic Bank (Adib) by nearly 28.8 per cent to Dh594.9 million.

The total net earnings of the UAE’s 23 banks and 28 foreign units slumped by about 12.6 per cent to Dh9.04bn in the first half of 2010 from around Db9.22bn in the first half of 2009, their financial statements showed.

Suwaidi said early this year there are plans to modify rules pertaining to Islamic banks in the UAE to bring them in line with the system and prevent fresh trouble.

The Central Bank has issued CDs to conventional banks regularly over the past few years to tap their massive liquidity but such issues have sharply slackened since the eruption of the 2008 crisis, which severely affected banks and forced the Central Bank to inject liquidity into the sector.

After a steady rise, the CDs declined from around D71.4bn at the end of 2009 to Dh67.4bn at the end of June this year.
 
Following are some of the terms set by the Central Bank for Islamic CDs:
 
PURPOSE OF ISSUANCE

The Shariah-compliant CD (ICD) is issued for two main purposes;
i. as a monetary policy tool for the Central Bank of UAE (CBUAE)
ii. as a liquidity management tool for the Islamic Banks (IBs)

Structure of Shariah-compliant CD: The ICD would be structured based on a Murabahah concept where the underlying asset would be commodities, as approved by the UAE Shariah Coordination Committee (SCC).
 
Examples: Islamic banks to place Dh100m with CBUAE for one year at 2.50% pa

STEPS

1. Islamic banks appoint CBUAE as an agent to buy commodity X from a commodity owner for Dh100m on spot basis. Payment will be made on the spot value date. Delivery of commodity X is on spot basis.

2. Islamic banks, then, sell commodity X to CBUAE for Dh100m plus profit at 2.50% on deferred payment basis. Payment will be made on the maturity date. Delivery of commodity X is on spot basis.

3. CBUAE sells commodity X to commodity buyer for Dh100m on spot basis. Payment will be received on spot value date.

MATURITY

- 1 week
- 1, 2, 3, 6, 9 and 12 months
- 2, 3, 4, 5 years
 
PRIMARY ISSUANCE

Tenor of one week to 12 months - through auction.

Dirham lCDs will be issued on the daily basis except Fridays, Saturdays and public holidays.

Dollar and euro lCDs will be issued on the daily basis except Fridays, Saturdays, Sundays and public holidays, based on demand.
Tenor two years to five years.
lssuance will be based on bilateral arrangement.
 
CUSTODY AND PROOF OF OWNERSHIP

CBUAE will be the sole custody of the ICD issued.
Proof of ownership as evidenced by the CBUAE records.
 
IT SYSTEM

The ICD will be auctioned through the CBUAE treasury platform.
All Islamic banks who wish to participate must install the Platform and will be provided with security tokens.
 
ISSUANCE PROCEDURES

1. Treasury Department (TD) will open and invite IBs through the CBUAE to bid for the lCDs at 8.30am
2. Bid must be in the form of profit rate pa (clean of commodity cost)
3. IBs could submit their bids from 8.30am to 10.30am
4. Auction will be closed sharp at 10.30am
5. TD will process the bidding from 10.30am to 1 1.30am
6. Only successful bidders will be informed by the TD at 1 1.30am
7. Successful bidders will be allocated time from 12.00pm to 3.30pm to transact commodity deal with CBUAE - the commodity deal must be transacted between CBUAE Front Office and IB Front Office
8. At the allocated time, CBUAE and IB would complete the commodity transaction
9. On the value date, the CBUAE will deduct the fund from IB Current Account