VOI - Voice of Indonesia | RRI - Radio Republik Indonesia

The UK’s Bank of England became the first central bank outside a Muslim-majority country to open an Alternative Liquidity Facility (ALF) earlier this month.

The facility gives Shari'ah-compliant banks that cannot pay or receive interest, a similar ability to place funds at the bank of England as conventional banks.

“I welcome the UK’s continued support of Islamic Finance. By doing so we are demonstrating that the UK values inclusion, equal access, and equal opportunity. By living out these values we not only do the right thing, but we ensure the economic and social prosperity of our societies," British Ambassador to Indonesia and Timor Leste Owen Jenkins said.

"I hope Indonesian financial institutions will consider taking advantage of this new opportunity," he added.

Under the ALF model, participant deposits are backed by a fund of high-quality Shari'ah-compliant securities known as sukuk.

The return from these instruments, net of operating costs, will be paid to depositors in lieu of interest. In the first instance, the fund has purchased sukuk issued by the Islamic Development Bank.

This further strengthens the UK’s position as the leading center of Islamic finance outside of Muslim-majority countries.

The UK was the first non-Muslim majority country to issue a Sovereign Sharia-compliant Sukuk in 2014, and a green Sukuk to unlock US $30+ billion of investment into green and sustainable activities at COP26. 

“The ALF will help the UK Islamic finance sector to compete with conventional peers while staying true to their founding principles; and will further strengthen the United Kingdom’s role as the leading international financial center for Islamic finance outside the Muslim world," Head of Sterling Markets, Rhys Phillips said.

Islamic banking is a relatively young but growing sector of the broader financial services industry. Numerous banks around the world offer Islamic, or Shari'ah-compliant, financial products. Among other things, this activity avoids the payment or receipt of interest.

Islamic banks in the UK are subject to the same strict regulatory requirements as conventional banks. This includes holding a buffer of high-quality liquid assets (HQLA), to meet obligations as they fall due.

Islamic banks now can hold deposits at the central bank to help meet their buffer requirements, having previously been unable to do this because deposits at the Bank of England are typically interest-bearing. 

The establishment of the Alternative Liquidity Facility is part of the Bank of England’s commitment to diversity, innovation, and financial inclusion.

This will help ensure fair and equal access and support from the central bank, by enabling Islamic banks - and any other UK banks facing formal restrictions from engaging in interest-based activity - to hold deposits at the central bank, just as conventional ones can.