Tools for Providing Liquidity to Islamic Banks from the Central Bank

No: 3/3/3319
Date: 10 Shaban 1445 Hijri
Corresponding to: 20 February 2024
Circular to licensed banks
Number (3/ 2024)
Topic: Tools for providing liquidity to Islamic banks from the Central Bank In order for the Central Bank to periodically review and evaluate its tools to keep pace with the best international practices of central banks, and with the aim of giving Islamic Banks more flexibility in managing their liquidity, it was decided to take the following measures:
First: Providing intraday liquidity to Islamic Banks through the goodwill loan (Qard Hasan) in exchange for pledge.
Providing intraday liquidity to Islamic Banks during the business day through the goodwill loan (Qard Hasan)

in exchange for pledging “government Sukuk and/ or government guaranteed Sukuk”, as follows:

1. The Islamic Bank submits a request to have intraday liquidity through the screens of TMON program within the DEPO-X system.
2. The Central Bank provides liquidity to the Islamic Bank on the basis of the goodwill loan (Qard Hasan) “in exchange for pledge” during the business day.
3. The Islamic Sukuk corresponding to the loan are pledged in the account designated for this purpose on the screens of the TMON program within the DEPO-X system, to cover the value of the loan in addition to any imposed guarantee margins (Haircut).
4. At the end of the intraday liquidity period on the national payments system (RTGS), the system debits the value of the loan to the account of the Islamic Bank (the borrower) without charging any additional amounts, and removes the pledge reference from the Sukuk specified in exchange for it.
5. In case that the borrowing bank is unable to repay the value of the loan at the end of the intraday liquidity period, the bank must apply to obtain liquidity for overnight and up to one week through the Unrestricted Investment Wakalah tool.
   Second: Providing liquidity to Islamic Banks for overnight or more through the Unrestricted Investment Wakalah An Unrestricted Master Investment Wakalah agreement will be concluded between the Central Bank and the Islamic Banks, according to which the Central Bank will be prepared to provide liquidity for overnight and up to one week to the willing Islamic Banks based on their request (At Islamic Banks discretion), or through holding auctions at the time, term and size that the Central Bank deems appropriate and in a way that achieves the operational objectives of the monetary policy (At CBJ discretion). In order to deal with this tool, Islamic Banks must open an account within them, designated for this purpose, under the name “an unrestricted investment wakalah account for the purpose of obtaining liquidity from the Central Bank,” and it will be referred to in these instructions as “the account designated for wakalah” and as follows:
   Providing liquidity to Islamic Banks for overnight and up to one week at the initiative of Islamic Banks (Standing Facility).
   The Islamic Bank wishing to obtain liquidity for overnight and up to one week shall submit a request to the Central Bank including the expected return to be achieved on the basis of the investment wakalah contract, in accordance with the Unrestricted Master Investment Wakalah agreement previously concluded, and according to the form approved for this purpose. The Central Bank (the principal) deposits the required financing amount in the current account of the Islamic Bank (the agent) at the Central Bank, for the purposes of investing it in accordance with the provisions of the Unrestricted Master Investment agreement. The Islamic Bank authorizes the Central Bank to pledge government Sukuk and/ or government guaranteed Sukuk in its favor (covering the value of the granted financing in addition to any guarantee margins that are imposed (Haircut)), provided that these Sukuk are financed from the bank’s own funds. In case that there are no government Sukuk and/ or government guaranteed Sukuk financed by the bank’s own funds, it is possible for the bank to convert Sukuk financed from the funds of the holders of joint investment accounts into Sukuk financed from the bank’s own funds and use them for this purpose, taking into account the Islamic accounting standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Number (21) (Disclosure on Transfer of Assets). Under the investment wakalah contract, the Central Bank pays a fee to the agent (the Islamic Bank) in accordance with what is specified in the Unrestricted Master Investment Wakalah agreement. The return obtained by the Central Bank (the principal) is represented by the return achieved by the “the account designated for wakalah” consistent with the duration of the investment and the performance of the assets included in this account. On the maturity date, the Islamic Bank (the agent) informs us of the actual return achieved, and then the Central Bank records the amount of financing granted to the Islamic Bank with the return on the Islamic Bank’s account and releases the pledge on the Sukuk. The agent is not considered a guarantor of the wakalah amount except in cases of infringement and negligence. Providing liquidity to Islamic banks at the initiative of the Central Bank (Open Market Operations). The Central Bank announces its desire to conclude unrestricted investment wakalah agreements with Islamic Banks to provide them with liquidity through holding auctions, and determines the size, the expected return, and the appropriate term for that. The Islamic Bank wishing to obtain liquidity submits a request to the Central Bank according to the conditions announced in the auction. After listing the requests received in the auction, the Central Bank (the principal) will allocate the accepted offers by depositing the specified amounts in the current accounts of the Islamic Banks (the agent), provided that they are used in “the account designated for
   wakalah” in exchange for authorizing the Central Bank to pledge government Sukuk and/ or government guaranteed Sukuk in its favor (covering the value of the financing granted in addition to any guarantee margins that are imposed (Haircut)), where these Sukuk are to be financed from the bank’s own funds. In case that there are no government Sukuk and/ or government guaranteed Sukuk financed by the bank’s own funds, it is possible for the bank to convert Sukuk financed from the funds of the holders of joint investment accounts into Sukuk financed from the bank’s own funds and use them for this purpose, taking into account the Islamic accounting standard issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Number (21) (Disclosure on Transfer of Assets). Under the investment wakalah contract, the Central Bank pays a fee to the agent (the Islamic Bank) in accordance with what is specified in the Unrestricted Master Investment Wakalah agreement. The return obtained by the Central Bank (the principal) is represented by the return achieved by the “the account designated for wakalah” consistent with the duration of the investment and the performance of the assets included in this account. On the maturity date, the Islamic Bank (the agent) informs us of the actual return achieved, and then the Central Bank records the amount of financing granted to the Islamic Bank with the return on the Islamic Bank’s account and releases the pledge on the Sukuk. The agent is not considered a guarantor of the wakalah amount except in cases of infringement and negligence. Third: The impact of implementing these tools on the balance sheet and liquidity requirements of Islamic Banks Impact on the balance sheet:
   For clarification purposes within the balance sheet, the Islamic Bank must add an item separate from the financial assets under the name (financial assets- pledged), whether at amortized cost or at fair value through the income statement, in which it shows the balance of the Sukuk that were pledged against the liquidity obtained according to the unrestricted investment wakalah tool for the benefit of the Central Bank of Jordan, and this balance corresponds within the liabilities to a separate item under the name of the unrestricted investment wakalah account with the Central Bank, according to the following clarifications:
   Clarification of financial assets– pledged*:
   December 31, 202-
   December 31, 202-
   Pledged financial assets
   Related financial liabilities
   Pledged financial assets
   Related financial liabilities
   Government Sukuk in exchange for the unrestricted investment wakalah Sukuk guaranteed by government in exchange for the unrestricted investment wakalah Total *

These Sukuk were pledged against the funds granted by the Central Bank of Jordan in exchange for the unrestricted investment wakalah agreements.
Clarification of the unrestricted investment wakalah accounts with the Central Bank:
As of December 31, 202-
The amount
Guarantees
The return the unrestricted investment wakalah accounts with the Central Bank Total The effect on the legal liquidity ratio:
For the purposes of calculating the legal liquidity ratio, the Islamic Bank includes the balance of the Sukuk that were pledged against the goodwill loan (Qard Hasan)/

the unrestricted investment wakalah account for the benefit of the Central Bank of Jordan in the numerator of the percentage in the item (Government securities/ Government of the Hashemite Kingdom of Jordan), with a weight of (100%), and in the denominator of the percentage, the amounts against the goodwill loan (Qard Hasan) agreements are included within the item of the total amounts borrowed, with a weight of (75%). As for the amounts corresponding to the agreements of unrestricted investment wakalah in favor of the Central Bank of Jordan, they are included in the percentage denominator within the item of (deposits of banks and other banking institutions whose maturity is one year or less),

with a weight of (100%).
Impact on the Liquidity Coverage Ratio (LCR):
The provisions of Article (Second/1) of the Liquidity Coverage Ratio (LCR) Instructions number (5/2020) dated 22/6/2020, shall be adhered to, by not including the Sukuk pledged against the goodwill loan (Qard Hasan) agreements and the unrestricted investment wakalah with the Central Bank in the numerator of the Liquidity Coverage Ratio. These instructions shall be effective as of their date, and any previous instructions that conflict with what was stated therein shall be cancelled. Governor Dr. Adel Sharkas