There was a very warm response from UK Islamic bankers to the speech at WIEF by Andrea Leadsom, economic secretary to the UK Treasury, when she said that the BoE would begin feasibility work next year on the plan. But Leadsom’s caveat that progress will be slow not quick must be wearying.
Contrary to what this stance suggests, there is very little practical reason why Shariah-compliant liquidity lines should be difficult. Those involved would do well to pull their fingers out to sustain interest and capitalise on the fanfare generated at WIEF.
The initiative is less complex and controversial than a sovereign sukuk. It just needs the rotation of short-term lending (say, for three or six months) with some kind of Shariah-compliant asset to back this – either via ijara (leasing), salam (forward contracts) or commodity murabaha (cost plus financing).
The BoE would not struggle to develop such contracts. This is not new territory. The UK’s Islamic banks have already been engaging in such activity between themselves, to the extent that they are able.
And if it needs a helping hand there is expertise in abundance. Malaysia and Bahrain have mastered short term liquidity for their Islamic banks and would love the honour of propagating such knowledge – particularly if it gives them one over Dubai, the self-proclaimed centre of the Islamic economy.
But bureaucratic dithering is something that Islamic bankers are only too used to in the UK. They have seen how many years it took for a UK government to finally issue a sukuk. They are well versed in HMT meetings that need half an hour of introductions before someone takes the initiative of pouring coffee. And they are inured to the uneven playing field they face against conventional banks because of a lack of progress on liquidity provisions.
Leadsom said the BoE is well aware that Islamic banks face serious difficulties in meeting liquidity requirements. Of course it is – the UK’s Islamic banks have been shouting about this problem since they opened their doors.
Having Shariah compliant liquidity lines is not going to be an earth shattering game-changer for all of the UK’s Islamic banks. But those that take deposits, such as Islamic Bank of Britain and BLME, would definitely welcome the fairer treatment it would give them.
No one doubts the BoE’s sincerity in tackling this challenge. The central bank knows it is a big one for Islamic banks and has become more and more pressing with the requirements of incoming banking regulation like Basel III. It has also undertaken months of useful consultation with senior Islamic banking officials.
All of this is good. But for once it would be nice to see the UK drop its ultra-cautious approach and bash out a plan – before the coffee gets cold.