Bangladesh Bank has announced plans to launch an Islamic interbank money market within the current fiscal year, providing Shariah-compliant banks with a structured platform for managing short-term liquidity. This initiative aims to bridge a longstanding gap in the financial system, as Islamic banks are currently unable to participate in the conventional call money market due to Shariah restrictions.
Currently, these banks face liquidity pressures, particularly during periods of temporary fund shortages. The proposed market will offer an alternative funding mechanism, enhancing efficiency in liquidity management. It will be accessible not only to fully-fledged Islamic banks but also to conventional banks operating Islamic branches and windows.
To design the framework, Bangladesh Bank has examined international models from countries such as Indonesia, Malaysia, and Bahrain, where Islamic interbank money markets are well established. Consultations with central banks in these jurisdictions have informed the planned structure.
Proposed Market Features
The interbank market will facilitate borrowing and lending for tenors of 1, 7, 14, 28, 90, and 180 days, with both collateralised and uncollateralised options available. A preliminary policy outline has already been circulated to commercial banks for feedback.
| Feature | Details |
|---|---|
| Eligible Institutions | Full Islamic banks, Islamic branches of conventional banks |
| Tenor Options | 1, 7, 14, 28, 90, 180 days |
| Borrowing Options | Collateralised and uncollateralised |
| Regulatory Oversight | Bangladesh Bank monitoring, no direct intervention |
An earlier attempt to establish such a system in 2011 did not succeed, but the renewed effort forms part of a broader strategy to strengthen liquidity conditions within the Islamic banking sector.
Industry Reactions
Arfan Ali, former Managing Director of Bank Asia, highlighted the significance of the move: “Once introduced, Islamic banks will be able to transfer funds among themselves, which is a positive development. Banks with surplus funds will be able to lend to those facing shortages, easing temporary liquidity constraints.”
Currently, Islamic banks manage liquidity through mechanisms such as the Islamic Bank Liquidity Facility, Bangladesh Government Islamic Investment Bonds, and interbank deposits based on mudaraba principles. However, these channels are often limited or inactive, making liquidity management challenging.
While the new market will provide flexibility and reduce dependence on the central bank, experts caution that it is not a panacea for structural issues. Financially weaker or newly established banks may face difficulties attracting funds initially, and improper use of interbank borrowing could exacerbate long-term vulnerabilities.
A senior Bangladesh Bank official stated that the platform will enhance monitoring of liquidity supply and demand within the Islamic banking sector, creating a more organised and resilient financial ecosystem.