New interim fund support (Mudarabah Liquidity Support) is introduced by Bangladesh Bank for Shari’ah-based Islamic banks in our country on Feb 2023.

On 05 February 2023, Bangladesh Bank Debt Management Department issued a circular regarding interim fund management for Shari’ah-based Islamic banks operating in our country, known as Mudarabah Liquidity Support (MLS), which will ensure the financial stability and resilience of Islamic banks.

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With this system, Shari’ah-based Islamic banks can get funds for 7, 14, and 28 days with minimal profit rates to meet their emergency fund crises. They must maintain a current account with Bangladesh bank to get this fund and apply in a prescribed application form by Bangladesh bank on any working day.

Main Features of Mudarabah Liquidity Support (MLS)

1. In this framework, Bangladesh Bank (BB) acts as the Investor (Rab al-Mal/Sahib al-Mal) and the bank act as the Investment Manager (Mudarib) under an agreed Profit-Sharing Ratio (PSR).
2. Bangladesh Bank accepts as collateral as banks Claims incentives against Remittance and Claims against Financial stimulus/incentives facilities. These collaterals shall be used to cover loss, if the bank fails to pay MLS amount due to negligence, misconduct or breach of contract and other relevant issues in this regard.
3. While providing MLS, the entire claim shall be treated as collateral, even if a haircut is imposed.

4. Under Mudarabah Liquidity Support (MLS) scheme Islamic banks may apply for minimum Taka 10 (ten) crores, or its multiples.
5. Profit rate shall be determined as equal to respective banks prevailing 03 (three) months MTDR (Mudarabah Term Deposit Receipt) rate at the time of availing MLS.
6. The tenor of the MLS shall be 07/14/28 days.
7. Profit for this facility calculated at Actual for 7,14 & 28 days.
8. The applicable haircut of collateral shall be as under: i) Remittance incentives: 10% of total incentive amount; ii) Financial stimulus/incentives: 10% of total incentive amount.

Eligible Collaterals for MLS Scheme:

For this funding, Bangladesh Bank considered banks;

• Claims against incentives against inward remittances are duly approved by the concerned department of BB and
• Claims against stimulus facilities provided by these banks are duly approved by the concerned department of BB.

Operating Procedures of Mudarabah Liquidity Support (MLS)

1. Islamic banks who are in need of short-term funding may apply for MLS on every working day to Securities Section of BB, Head Office along with required documents.
2. Investment decisions will be made by the concerned department(s) and the Auction Committee of BB after scrutinization of the application received from banks.
3. The Collateral of MLS shall be assigned in favor of BB during the MLS period.
4. This fund will be credited to the current account of the respective
5. bank maintained with BB.
6. BB reserves the complete discretionary power to accept or reject the application or provide partial MLS.

Documents required by BB for applying for MLS

1. A written request, duly signed by the CEO/MD of the bank along with the list of collateral and their value.
2. Banks have to provide valid reason for the need of this facility.
3. Assignment letter duly signed by the CEO/MD of the bank to transfer the collateral in favor of BB for MLS period.
4. A debit authority signed by two authorized officials of the bank declaring that at maturity BB can debit the current account of the respective bank for the MLS amount and profit.
5. Undertaking of the bank duly signed by the CEO/MD for adjusting MLS amount by BB if any interim payment is received by the bank during the MLS period.

Settlement Procedures of this facility at maturity/early settlement:

1. In case of maturity, BB will debit the current account of the bank to recover the investment amount and the profit and release the collateral.
2. If any payment is made by the bank within the set period, this amount will be adjusted and the bank will have to pay profit for the remaining amount;
3. Banks also have the opportunity for early settlement of full or partial MLS amount and in that case, profit will be charged for the uses period only;
4. If MLS matures on a holiday, then the tenor of MLS will be extended by the number of holidays, and the profit calculation will incorporate this extended period;
5. At the end of the calendar year, profit will be adjusted according to the actual profit of the respective bank.

Actions will be taken if banks fail to meet the terms of contract

1. If the beneficiary bank fails to adjust the facility within the stipulated time, BB ill adjust the investment amount along with applicable profit by disposing of collateral.
2. Shari’ah Board/Committee of respective bank shall be responsible to verify Shari’ah compliance of each MLS transaction with BB.
3. BB has the authority to change/extend/add or remove policies and procedures related to MLS at the point of necessity.

The interim fund management will increase the investable capacity of Islamic Banks as well as strengthen the capital of Islamic Banks even in crises, thereby this scheme will boost the economic structure of our country. It is however necessary to make sure that the funds will be used effectively.

Source: BB Website.