On 2 December 2020, the Bank of England (BoE) published a speech by Andrew Hauser (Executive Director, Markets) entitled Why Islamic finance has an important role to play in supporting the recovery from COVID – and how the Bank of England’s new alternative liquidity facility can help.
In his speech Mr Hauser discusses the BoE’s work on Islamic finance and announces the launch date for its new Shari’ah compliant non-interest based deposit facility, the first such account from a Western central bank.
The Alternative Liquidity Facility (ALF) will be open for business from Q1 2021. The new facility will provide UK Islamic banks (and any other UK banks with formal restrictions on engaging in interest-based activity) with greater flexibility in meeting high quality liquid assets’ requirements, enabling them to hold a reserves-like asset in a non interest based environment.
The ALF will be structured as a wakalah or fund-based facility: a commonly used model in Islamic finance. In simple terms, that means that participant deposits will be backed by a fund of assets, the return from which, net of hedging and operational costs, will be passed back to depositors in lieu of interest.
Over the coming months, the BoE will finalise legal documentation, complete its operational testing and begin the onboarding process for eligible applicants. Firms should expect to commence this work from January 2021. Once operational, the ALF should help put the UK Islamic finance sector on a more level footing with the rest of the market, giving UK firms greater flexibility in meeting their liquidity requirements, and helping them to compete with conventional peers while staying true to their founding principles.