Short-term instrument developed

Bahrain's central bank and a local Islamic bond trading company said yesterday they had developed an instrument that would increase Islamic financial institutions' access to short-term cash.

Islamic lenders often complain of a lack of short-term liquidity management tools, as conventional repurchase agreements with the central bank are off-limits given Islam's ban on interest.

The Islamic Sukuk Liquidity Instrument (ISLI), developed by the central bank and Bahrain's Liquidity Management Centre (LMC) will allow holders of central bank-issued dinar-denominated ijara sukuk to borrow money against the instrument for one week.

The arrangement mirrors a typical repurchase agreement. The instrument is due to be launched later this month, but no charge – in place of interest typically earned in a repurchase agreement – has yet been determined. Islamic bonds are based on physical assets, such as property, that pay a rent or other return to bondholders. Rent-paying sukuk is said to use an ijara structure.

Secondary trading of sukuk is minimal, limiting their use as a liquidity management tool, a fact Bahrain's central bank says deters some Islamic financial institutions from participating in its regular sukuk sales.

"The availability of instruments such as ISLI will help create a deeper and more liquid sukuk market, which requires a variety of short and long term instruments to enhance Islamic banks' ability to efficiently manage their liquidity," a joint central bank-LMC statement said.

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