Bangladesh Bank (BB) being the country’s central bank is set to unveil a new scheme for the cash-strapped Islamic banks. Under the new mechanism, the Islamic Shariah-based banks will be able to get support on liquidity preferences from the banking sector regulator in the form of a deposit guarantee, which is also broadly known as “collateral against funds”.
This liquidity support from the BB meant for the Islamic banks will be used to attract remittance by providing the remitters with a stimulant. Collateral is a commitment to pay back a loan, and if the borrower becomes unable to pay back the loan, the lender has the authority to seize the collateral to restore the loan.
How Bangladesh Bank is going to place the new tool?
According to a BB official, banks are required to provide a 2.5% incentive on remittances to clients, but only get back the full fund after three months. This causes banks to suffer from a liquidity crisis for a certain period, and the amount of funds they gave to clients becomes unreachable for this time.
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Keeping these in mind, BB is introducing Mudarabah Liquidity Support (MLS) to help Shariah-compliant banks recapture funds during the three months. The central bank is expected to issue a circular shortly, and banks that are run by Shariah rules will also be able to seek assistance from the stimulus packages of the government.
Mudarabah and MLS
Mudarabah is an Islamic financial partnership tool where two parties, the investor and the entrepreneur, join together to carry out a business venture. The two parties share profits and losses, and any forms of interest are prohibited here. It is used to provide support to small businesses and boost economic growth.
Whereas, MLS is a type of financial tool used by Islamic financial institutions to address the liquidity shortage problem faced by businesses. It combines the different components of the traditional Mudarabah financing system to provide short-term financing benefits. MLS is not a new case in the Islamic banking sector of different parts of the world, as countries with a Muslim majority and Islamic practices use it for their banking cultures.
Among the countries that use MLS, Malaysia, the UAE, Saudi Arabia, and Indonesia deserve mention here.
Furthering MLS in Bangladesh
Although banks initially provide loan packages from their own pockets in case of funds disbursed to the borrowers, these banks will get those funds back from the stimulus project of BB, and it will happen in three months. So they need not wait for the end of this period.
The lenders, under this project, will be accommodated up to 90% of the funds they have disbursed in cash and loans under the stimulus project.
There are two stimulus packages of Bangladesh Bank that will be used to get funds in this case. The tenures set for repayment are scheduled at respectively 7, 14, and 28 days, and each time, the minimum amount of taka to be taken by the banks should not be less than 10 taka.
Is this the first time BB going to launch scheme like this?
Last December, BB introduced the Islamic Bank Liquidity Facility (IBLF) to help Islamic financial bodies manage their liquidity needs.
Under this facility, the central bank of Bangladesh provides short-term financing to Islamic banks of Bangladesh to help them meet their needs and take action. The support is for all Islamic financial institutions, but may vary depending on specific requirements.
Limitations of IBLF
Though it’s a promising tool in the financial sector, it is also not out of limitations, which may vary in several ways. The funding available for this project may be limited, as no asset is abundantly available on this earth, and Bangladesh is already facing a currency crisis. So, BB itself is not out of this problem.
The system limits the refunding of loans to a very short period, making it difficult for banks to maintain the time log of the central bank. Additionally, the cost of borrowing under the IBLF may be higher than other forms of financing – thereby leading to higher risk in terms of counting the tool under CBRA.
Will MLS the upcoming tool of BB help Bangladesh?
The MLS tool for Islamic banks in Bangladesh is designed to help them develop a Shariah-compliant banking system and ensure well-paced growth. This tool can also help in the liquidity sectors of these banks.
Under this tool, the short-term loans provided by BB can help Islamic banks meet their obligations to clients in financial difficulties and provide broader liquidity options. If incorporated properly, these banks can feel safe from liquidity shortages.
And if this happened so, then the overall quality of the Islamic banking sector will also improve notably. In short, this program will be a helpful tool for the economy of Bangladesh to promote economic growth, through increased investment, job creation, and other substantial benefits for sure.
Will any limitation stand in the way following this MLS project?
MLS has the potential to help Bangladesh’s economy, but may not be enough to address all of the challenges in the banking sector. Additional measures are needed here to support growth and stability.
In time of adaptation, Bangladesh may face limitations for the MLS tool, which could lead to excessive costs for Bangladesh Bank if the central bank is forced to provide funds to banks or institutions unable to repay them. BB is the mother of the banking sector in Bangladesh, and any hazard for them will lead to a burden on the overall economy.
To ensure that the MLS programme is implemented under Shariah rules and regulations, the related authorities may need to invest more, increasing the cost of the project. The tool is only available to Islamic banks, and other types of banks have no authority to benefit from it.
The efficiency and usefulness of the MLS scheme in Bangladesh may be affected by the apparently fragile economic condition, interest rates, and other factors. BB may not be able to provide support in times of need.