Britain’s central bank has taken deposits from participating UK-based Islamic banks for the first time after opening its Alternative Liquidity Facility (ALF).

The facility was first launched last year in a speech by Andrew Hauser, executive director for markets at the Bank of England.

Islamic banking is a growing sector in the broader financial services market. A number of banks around the world offer Shari’ah compliant financial products. Among other things, this activity avoids the payment or receipt of interest.

The ALF is a non-interest-based deposit facility, which is the first of its kind offered by a Western central bank. It is designed to provide banks that cannot pay or receive interest with a "similar ability" to place funds at the Bank of England as conventional banks.

The bank said that this is an important step in creating a “level playing field” and enables greater flexibility in meeting regulatory requirements under Basel III prudential rules.

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.

“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 centre for Islamic finance outside the Muslim world,” said Rhys Phillips, head of sterling markets, Bank of England.

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