Central Bank of Jordan Memorandum No. 3/2024: Liquidity Provision Tools for Islamic Banks

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Central Bank of Jordan Number: 3/3/3319 Date: 10 Sha'ban 1445 AH Corresponding to: 20 February 2024 AD

Memorandum to Licensed Banks No. (3 / 2024)

Subject: Liquidity Provision Tools for Islamic Banks from the Central Bank

In its commitment to periodically review and evaluate its tools to align with global best practices for central banks, and with the aim of granting Islamic banks greater flexibility in managing their liquidity, the following measures have been decided:

First: Provision of Daytime Liquidity for Islamic Banks through Interest-Free Loans (Qard Hasan) against Pledge. Daytime liquidity for Islamic banks during the working day is provided through an interest-free loan (Qard Hasan) against the pledge of "government sukuk and/or government-guaranteed sukuk," as follows:

1. The Islamic bank submits a request for daytime liquidity through the TMON program screens within the DEPO-X system.
2. The Central Bank provides liquidity to the Islamic bank on the basis of an interest-free loan (Qard Hasan) against pledge during the working day.
3. The corresponding Islamic sukuk are pledged in the dedicated account on the TMON program screens within the DEPO-X system, covering the value of the loan plus any imposed collateral margins (Haircut).
4. At the end of the daytime liquidity period, the National Payments System (RTGS) debits the loan value from the Islamic bank's (borrower's) account without charging any additional amounts, and removes the pledge indicator from the specified sukuk.

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Central Bank of Jordan

5. In the event that the borrowing bank is unable to repay the loan value at the end of the daytime liquidity period, the bank must submit a request for liquidity for a term of one night up to a maximum of one week through the Unrestricted Investment Wakalah tool.

Second: Provision of Liquidity for Islamic Banks for One Night or More through Unrestricted Investment Wakalah. An Unrestricted Master Investment Wakalah Agreement is concluded between the Central Bank and Islamic banks, whereby the Central Bank is prepared to provide liquidity for one night up to one week to interested Islamic banks at their discretion, or through auctions at a time, term, and volume deemed appropriate by the Central Bank to achieve the operational objectives of monetary policy (at CBJ discretion).

To deal with this tool, Islamic banks must open a dedicated account for this purpose named "Unrestricted Investment Wakalah Account for Obtaining Liquidity from the Central Bank," referred to in these instructions as the "Dedicated Wakalah Account," as follows:

A. Provision of Liquidity for Islamic Banks for One Night up to One Week at the Initiative of Islamic Banks (Standing Facility).

1. The Islamic bank wishing to obtain liquidity for one night up to one week submits a request to the Central Bank, including the expected return to be achieved based on the Investment Wakalah contract, in accordance with the previously concluded Unrestricted Investment Wakalah Agreement, using the approved model for this purpose.
2. The Central Bank (Principal) deposits the required financing amount in the current account of the Islamic bank (Agent) at the Central Bank, for the purpose of investing it in accordance with the provisions of the main Unrestricted Investment Agreement.

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Central Bank of Jordan

3. The Islamic bank authorizes the Central Bank to pledge government sukuk and/or government-guaranteed sukuk on its behalf (covering the value of the granted financing plus any imposed collateral margins Haircut), and these sukuk must be funded from the bank's own funds. In the event that government sukuk and/or government-guaranteed sukuk funded from the bank's own funds are not available, the bank may convert sukuk funded from joint investment account owners' funds into sukuk funded from the bank's own funds and use them for this purpose, while observing the accounting standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) No. (21) (Disclosure of Asset Transfers).
4. Under the Investment Wakalah contract, the Central Bank pays a fee to the Agent (Islamic bank) as determined in the main Unrestricted Investment Wakalah Agreement.
5. The return obtained by the Central Bank (Principal) consists of the return achieved by the "Dedicated Wakalah Account," consistent with the investment duration and the performance of the assets included in this account.
6. On the maturity date, the Islamic bank (Agent) notifies us of the actual realized return, after which the Central Bank debits the financing amount granted to the Islamic bank along with the return to the Islamic bank's account and releases the pledge on the sukuk.
7. The Agent is not liable for the Wakalah amount except in cases of misconduct and negligence.

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Central Bank of Jordan

B. Provision of Liquidity for Islamic Banks at the Initiative of the Central Bank (Open Market Operations).

1. The Central Bank announces its intention to conclude Unrestricted Investment Wakalah agreements with Islamic banks to provide them with liquidity through auctions, specifying the volume, expected return, and appropriate term.
2. The Islamic bank wishing to obtain liquidity submits a request to the Central Bank in accordance with the conditions announced in the auction.
3. After collating the requests received in the auction, the Central Bank (Principal) allocates funds to accepted bids by depositing the allocated amounts into the current accounts of Islamic banks (Agents), to be used in the "Dedicated Wakalah Account" against authorizing the Central Bank to pledge government sukuk and/or government-guaranteed sukuk on its behalf (covering the value of the granted financing plus any imposed collateral margins Haircut), and these sukuk must be funded from the bank's own funds. In the event that government sukuk and/or government-guaranteed sukuk funded from the bank's own funds are not available, the bank may convert sukuk funded from joint investment account owners' funds into sukuk funded from the bank's own funds and use them for this purpose, while observing the accounting standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) No. (21) (Disclosure of Asset Transfers).
4. Under the Investment Wakalah contract, the Central Bank pays a fee to the Agent (Islamic bank) as determined in the main Unrestricted Investment Wakalah Agreement.
5. The return obtained by the Central Bank (Principal) consists of the return achieved by the "Dedicated Wakalah Account," consistent with the investment duration and the performance of the assets included in this account.

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Central Bank of Jordan

6. On the maturity date, the Islamic bank (Agent) notifies us of the actual realized return, after which the Central Bank debits the financing amount granted to the Islamic bank along with the return to the Islamic bank's account and releases the pledge on the sukuk.
7. The Agent is not liable for the Wakalah amount except in cases of misconduct and negligence.

Third: Impact of Implementing These Tools on the Balance Sheet and Liquidity Requirements for Islamic Banks

1. Impact on the Balance Sheet: For clarification purposes within the balance sheet, the Islamic bank must add a separate line item for financial assets named (Financial Assets - Pledged), either at amortized cost or fair value through profit or loss, showing the balance of sukuk pledged against liquidity obtained through the Unrestricted Investment Wakalah mechanism in favor of the Central Bank of Jordan. This balance is matched in the liabilities section by a separate line item named "Unrestricted Investment Wakalah Account with the Central Bank," according to the following explanations:

• Explanation of Financial Assets - Pledged*:

	December 31, 202	December 31, 202
	Pledged Financial Assets	Related Financial Liabilities
Government financial sukuk against Unrestricted Investment Wakalah
Government-guaranteed financial sukuk against Unrestricted Investment Wakalah
Total

*These sukuk were pledged against funds granted by the Central Bank of Jordan against Unrestricted Investment Wakalah agreements.

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Central Bank of Jordan

• Explanation of Unrestricted Investment Wakalah Accounts with the Central Bank: As of December 31, 202

	Amount	Collateral	Return
Unrestricted Investment Wakalah Accounts with the Central Bank
Total

2. Impact on the Legal Liquidity Ratio: For the purpose of calculating the legal liquidity ratio, the Islamic bank shall include the balance of sukuk pledged against the Qard Hasan / Unrestricted Investment Wakalah account in favor of the Central Bank of Jordan in the numerator under the item (Government securities / Government of the Hashemite Kingdom of Jordan) with a weighting factor of (100%). In the denominator of the ratio, amounts corresponding to Qard Hasan agreements are included under the item "Total Borrowed Amounts" with a weighting factor of (75%). As for amounts corresponding to Unrestricted Investment Wakalah agreements / in favor of the Central Bank of Jordan, they are included in the denominator under the item (Deposits of banks and other banking institutions with a remaining maturity of one year or less) with a weighting factor of (100%).

3. Impact on the Liquidity Coverage Ratio (LCR): The provisions of Article (Second/1) of the Liquidity Coverage Ratio (LCR) Instructions No. (5/2020) dated 2020/6/22 shall be complied with, by not including sukuk pledged against Qard Hasan and Unrestricted Investment Wakalah agreements with the Central Bank in the numerator of the liquidity coverage ratio.

These instructions shall be effective from their date, and any previous instructions conflicting with them are repealed.

Governor Dr. Adel Al-Sharkas