Central Bank confirms plan for Islamic CDs

The UAE Central Bank has confirmed plans to issue the region’s first Islamic certificates of deposits (CDs) to provide local Shariah-compliant lenders an alternative to investing their excess liquidity in foreign markets.

Saif Hadef Al Shamsi, senior executive director at the Central Bank’s Treasury Department, said the Shariah-compliant CDs would be in dirham and they could become available just before the end of this year.

“The new Shariah-compliant CDs will be in dirham and are expected to be issued before the year end,” he told the Arabic language daily 'Al Bayan' on Tuesday.

“We have almost reached a final mechanism to deal in this new Islamic investment instrument following talks between the Central Bank and representatives from Islamic banks in the UAE.”

Shamsi said the new 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.”

In press remarks in June, Shamsi 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.

Bankers at a conference in the capital reported on Monday that the Central Bank is in the process of issuing Shariah-compliant CDs to allow Islamic banks to manage their liquidity and give them a new investment tool at home.

Afaq Khan, Chief Executive of StanChart's Islamic banking unit, said test transactions could take place as early November. "It will be a tool to absorb the excess liquidity in the Islamic money market," Khan said at an Islamic finance conference.

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 Dh1.24 billion 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.

Central Bank Governor Nassir bin Sultan Alsuwaidi 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. He said the Central Bank had been involved in talks with the country’s Islamic banks on such rules.

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.
 

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