The Alternative Liquidity Facility

News release

The Bank of England has today opened the Alternative Liquidity Facility (ALF), which has taken deposits from participating UK-based Islamic banks for the first time.

The ALF was launched in a speech given by Andrew Hauser, Executive Director for Markets, in December 2020. It is a non-interest-based deposit facility, the first of its kind offered by a Western central bank, 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. This is an important step in providing a level playing field, and enabling 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.

Commenting, Head of Sterling Markets, Rhys Phillips said; “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.”

Notes to Editors

1. Islamic banking is a relatively young but growing sector of the broader financial services industry. Numerous banks around the world offer Islamic, or Shari’ah compliant, financial products. Among other things, this activity avoids the payment or receipt of interest.
2. Islamic banks in the UK are subject to the same strict regulatory requirements as conventional banks. This includes holding a buffer of high quality liquid assets (HQLA), to meet obligations as they fall due. Conventional banks can hold deposits at the central bank to help meet their buffer requirements, but Islamic banks have been unable to do this previously, because deposits at the Bank of England are typically interest bearing.
3. As part of its commitment to diversity, innovation and financial inclusion, the Bank has therefore established the ALF. This will help level the playing field by enabling Islamic banks - and any other UK banks facing formal restrictions from engaging in interest-based activity - to hold deposits at the central bank.
4. Further information on Islamic banking and the Bank’s work in this area can be found in this 2017 Quarterly Bulletin article and the December 2020 speech given by Andrew Hauser.