How will the new Islamic interbank system ease liquidity stress?

Bangladesh Bank has decided to introduce an Islamic interbank money market within the current fiscal year to provide Shariah-compliant banks with a structured platform for managing short-term liquidity.

At present, Islamic banks are unable to borrow through the conventional call money market due to Shariah restrictions, often leaving them under pressure during liquidity shortages. The proposed market is set to create an alternative funding mechanism, making liquidity management more efficient.

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 new system will enhance flexibility in fund transfers among Islamic banks. Rather than relying solely on the central bank for short-term fund management, banks will be able to source liquidity from their peers, he said. 

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

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 will be recoverable, he said.