Bangladesh Bank moves to launch Islamic interbank money market by June

To develop the framework, the Bangladesh Bank has reviewed international practices, particularly in countries such as Indonesia, Malaysia, and Bahrain, where Islamic interbank money markets are well-established. The central bank has also engaged with its counterparts in these jurisdictions.

Under the proposed system, transactions will be allowed for tenors of 1, 7, 14, 28, 90 and 180 days. Both collateralised and uncollateralised borrowing options will be available. The central bank has already circulated a policy outline among commercial banks.

An earlier attempt to introduce a similar interbank arrangement for Islamic banks in 2011 failed to gain traction. The renewed initiative is part of broader efforts to strengthen liquidity conditions in the sector.

Conventional banks can easily manage liquidity shortages by borrowing from the call money market. The initial plan to establish a similar interbank market for Islamic banks was conceived during the tenure of former governor Ahsan H Mansur.

A positive sign for the sector

Arfan Ali, former managing director of Bank Asia, noted that the absence of an interbank mechanism had often forced Islamic banks to seek funds outside Shariah-compliant frameworks. 

“Once introduced, Islamic banks will be able to transfer funds among themselves, which is a positive development,” he said.

He added that banks with surplus funds would be able to lend to those facing shortages, easing temporary liquidity constraints. “Currently, some Islamic banks rely on borrowing from other banks or receive special support from the central bank due to the lack of suitable financial instruments.”

A senior official at a Shariah-based bank said, “Islamic institutions cannot borrow from conventional banks or access central bank liquidity through repo operations. While they can raise funds through Islamic sukuk, the volume remains insufficient compared to demand.” 

What Islamic banks do now

At present, Islamic banks rely on several mechanisms to manage liquidity. These include the Islamic Bank Liquidity Facility, where sukuk must be provided as collateral to obtain support from the central bank. 

They also use the Bangladesh Government Islamic Investment Bond, where banks with surplus funds place deposits for three- and six-month tenors. However, this fund is currently inactive due to a lack of available resources.

In addition, Islamic banks manage liquidity through interbank deposits based on mudaraba principles, offering profit-sharing returns. In times of cash shortfall, banks often rely on deposits from peer institutions to bridge gaps.

According to a senior Bangladesh Bank official, the proposed interbank market will provide a more organised platform for liquidity management without direct intervention from the central bank, although it will remain under regulatory monitoring. 

The platform will also help the central bank better assess liquidity demand and supply within the Islamic banking segment, an area that is currently difficult to track accurately.

What the new system will offer

Industry insiders believe the new system will increase flexibility in fund management. Banks facing short-term deficits, such as overnight imbalances in current accounts, will be able to borrow from other Islamic banks instead of depending solely on the central bank.

However, concerns remain regarding newly formed or financially weak banks. A senior official noted that such institutions may initially struggle to attract funds from the interbank market due to concerns over repayment capacity and limited income streams.

The managing director of a bank said the implementation of this system would enhance flexibility in fund transfers among Islamic banks. Rather than relying solely on the central bank for short-term fund management, banks would be able to source liquidity from their peers, he said. 

“If a bank’s current account suddenly turns negative, it could borrow overnight from another bank to return to a positive balance, thereby significantly expanding the options available to these institutions,” said the banker.

However, a senior Bangladesh Bank official noted that it will be challenging for Sammilito Islami Bank to secure interbank loans immediately following its formation. There is an underlying concern regarding whether funds lent to this newly established institution would be recoverable, he said.

Not a long-term solution

Experts have cautioned that the initiative should not be viewed as a long-term solution. A former managing director of a private Islamic bank said that while the interbank market can help manage short-term liquidity pressures, it cannot resolve deeper structural issues, including those arising from financial irregularities.

“If mismanaged, using interbank funds to address long-term crises could backfire,” he warned, emphasising the need for strong central bank oversight to ensure proper utilisation of borrowed funds.