OREANDA-NEWS. The April launch of one-week sharia-compliant contracts with the central bank will benefit Bahrain's Islamic banks because they broaden the range of options available for short-term liquidity management, says Fitch Ratings. The UAE's central bank has also extended the range of instruments it accepts as collateral for accessing liquidity to include sharia-compliant securities. This will help the UAE's Islamic banks, which often hold these securities.

Bahrain and UAE-based Islamic banks have so far held excess liquidity either in cash or monthly offerings of central bank sukuk, with maturities between three and six months. This placed them at a disadvantage to conventional banks, which have a wide range of interest-earning liquidity management options available.

Efforts to develop sharia-compliant liquidity tools are picking up in several Gulf countries, notably Oman. These tools will be important for Islamic banks to boost their competitive positions, all the more so as the pace of growth in Islamic financial services is outstripping conventional banking growth in the region.

Islamic finance is set to expand as large numbers of relatively under-banked Muslims seek banking services in line with economic development in their home countries, and some countries with large Muslim populations seek to invest their wealth in sharia-compliant instruments. Regulatory and tax limitations could hold back the development of Islamic banking, as could a lack of workable tools that accommodate sharia rules. Bahrain and the UAE's introduction of new liquidity management tools marks a small but important step towards overcoming some of these challenges.