Bangladesh Bank has decided to establish an Islamic interbank money market by June of the current fiscal year, creating a dedicated platform for Shariah-compliant banks to manage short-term liquidity efficiently. The move addresses a critical gap in the financial system, as Islamic banks cannot currently access the conventional call money market due to religious restrictions.
Without an appropriate interbank mechanism, Islamic banks often face liquidity pressures, particularly during periods of cash shortfall. The new market will provide an alternative avenue for borrowing and lending, enabling smoother fund management within the sector. Both fully-fledged Islamic banks and conventional banks operating Islamic branches or windows will be eligible to participate.
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Learning from International Practices
Bangladesh Bank has studied international models in countries such as Malaysia, Indonesia, and Bahrain, where Islamic interbank money markets are well established. Discussions with central banks in these jurisdictions have informed the design of the proposed framework, ensuring it meets both operational and Shariah compliance requirements.
Market Structure and Features
The interbank market will permit transactions with the following parameters:
| Feature | Details |
|---|---|
| Eligible Institutions | Full Islamic banks, Islamic branches of conventional banks |
| Tenor Periods | 1, 7, 14, 28, 90, 180 days |
| Transaction Types | Collateralised and uncollateralised borrowing/lending |
| Oversight | Regulatory monitoring by Bangladesh Bank, no direct intervention |
The initial concept was first proposed in 2011, but it failed to gain traction. The renewed effort is part of a broader initiative to strengthen liquidity conditions in the Islamic banking segment, providing a structured, market-based approach rather than relying solely on central bank intervention.
Current Liquidity Management Practices
Islamic banks currently manage liquidity through mechanisms such as:
- Islamic Bank Liquidity Facility: Borrowing against sukuk as collateral from the central bank.
- Bangladesh Government Islamic Investment Bonds: Placing surplus funds in three- and six-month deposits (currently underutilised).
- Interbank Mudaraba Deposits: Profit-sharing deposits between peer institutions.
Despite these instruments, banks often face shortfalls, requiring temporary borrowing from other institutions or special support from the central bank.
Industry Perspectives
Arfan Ali, former Managing Director of Bank Asia, observed: “The new interbank market will allow Islamic banks to lend to each other, reducing dependency on the central bank. This will ease short-term liquidity pressures and improve overall fund management flexibility.”
However, experts caution that the initiative is not a permanent solution. Newly established or financially weaker banks may initially struggle to attract interbank funding. Mismanagement of borrowed funds could worsen long-term vulnerabilities, underscoring the need for robust regulatory oversight.
A senior Bangladesh Bank official noted that the platform will also provide enhanced insight into liquidity supply and demand within the Islamic banking sector, enabling better monitoring and more resilient operations.