The State Bank of Pakistan (SBP) has introduced Shariah compliant standing ceiling facility and open market operations (OMO) injections for Islamic banking institutions (IBIs). As the size of the Islamic banking industry is increasing, SBP recognises the need to introduce Shariah compliant liquidity facilities for IBIs, the central bank said in a statement. With a view to bring IBIs at par vis-à-vis their conventional counterparts in terms of liquidity management avenues, and to enhance SBP’s tools for managing market’s liquidity as part of its monetary policy objective, SBP has introduced the aforementioned facilities. The structure and broad features of these facilities are given below. Shariah Compliant Standing Ceiling Facility is a Mudarabah based Financing Facility (MFF) whereby SBP will provide financing to IBIs on an overnight basis against Shariah compliant collateral. IBIs shall place the funds received from SBP in a special pool consisting of high quality assets. The MFF will be offered at an ‘Expected Rate’ – equivalent to conventional overnight reverse repo rate – based on a Profit Sharing Ratio agreed between the SBP and IBI at the onset of the transaction. For Shariah Compliant open market operations (injections), Modaraba mode of financing will be used. It would be pertinent to mention here that this open market operations (OMO) facility will currently be available for ‘injection’ i.e. provision of liquidity purposes only. Similar to conventional OMOs, SBP will be conducting Shariah Compliant OMOs (Injections) based on market liquidity conditions through a multiple price competitive bidding process for tenors as announced by SBP from time to time, against collateral. Once the expected rate of return is finalized through a competitive bidding process, the funds provided by SBP shall be invested in a pool of high quality assets by the respective IBI. SBP and IBI shall agree a profit sharing ratio at the onset of the transaction. Introduction of aforesaid liquidity facilities will bring Islamic banking industry at par with their conventional counterparts and enable them to effectively manage their short-term liquidity. This would strengthen financial intermediation by IBIs and enable them to offer better returns and rates to their customers on deposits and loans. Further, introduction of proposed facilities will also strengthen monetary policy transmission mechanism & enhance the effectiveness of monetary policy implementation by SBP to achieve the ultimate objective of price stability.