SBP Introduces Shariah Compliant OMO Injections for IBIs

The State Bank of Pakistan (SBP) has unveiled new Shariah-compliant liquidity facilities, including a standing ceiling facility and open market operations (OMO) injections, specifically designed for Islamic Banking Institutions (IBIs). This strategic move comes as the Islamic banking sector continues to grow, highlighting SBP’s commitment to equipping IBIs with robust liquidity management tools.

Enhancing Liquidity Management for Islamic Banks

SBP recognizes the increasing scale of the Islamic banking industry and aims to provide Shariah-compliant solutions that match the liquidity management options available to conventional banks. This initiative is part of SBP’s broader objective to improve market liquidity management and support monetary policy goals.

Key Features of the New Facilities

1. Shariah-Compliant Standing Ceiling Facility: This facility is based on Mudarabah Financing, where SBP will offer overnight financing to IBIs against Shariah-compliant collateral. IBIs are required to place the funds received in a special pool of high-quality assets. The financing will be provided at an ‘Expected Rate,’ similar to the conventional overnight reverse repo rate, with a Profit Sharing Ratio agreed upon by SBP and the IBI at the start of the transaction.
2. Shariah-Compliant Open Market Operations (OMOs): Utilizing the Modaraba mode of financing, these OMOs will be available for liquidity injection purposes only. SBP will conduct these OMOs based on market liquidity conditions, using a competitive bidding process for various tenors. Once the expected rate of return is established, SBP will provide funds, which IBIs will invest in a pool of high-quality assets. The Profit Sharing Ratio for each transaction will be agreed upon in advance.

Benefits for the Islamic Banking Sector

The introduction of these liquidity facilities aims to level the playing field between Islamic and conventional banks, enabling IBIs to manage their short-term liquidity more effectively. This enhancement in liquidity management will bolster financial intermediation, allowing IBIs to offer competitive returns and rates on deposits and loans. Additionally, these facilities will strengthen the monetary policy transmission mechanism and improve the effectiveness of SBP’s monetary policy implementation, contributing to overall price stability.