A new call money market -- Islamic Interbank Fund Market (IIFM) -- will be introduced for the sharia-based banks in Bangladesh .Transactions will be based on profit instead of interest.

Bangladesh Bank Governor Atiur Rahman yesterday approved the proposal for formation of the market.

BB Executive Director SK Sur Chowdhury told The Daily Star that the central bank will issue a circular in this regard in a couple of days and they are hopeful that the market will take off next month.

Although the Islamic sharia-based banks have got about 20 percent market share of the total asset and liability in the banking industry, they have no inter-bank sharia-based market, Chowdhury said.

As a result, the banks faced problem in excess liquidity management, and on the other hand if a bank needed money suddenly, unlike the commercial banks, they had no option, Chowdhury said.

The IIFM will solve this problem of the Islamic banks.

In the call money or overnight money market, the commercial banks make direct transactions with other banks. But in case of a sharia-based call money market, the banks will transact with each other through a separate fund which will be under the custodianship of the central bank.

According to proposed rules, if any bank has excess fund, it will invest the amount in the IIFM for one day.

Another Islamic bank requiring fund will borrow the money from the IIFM for one day.

The rate of profit in the Islamic bank call money market will be determined on the basis of the profit the bank gives to its depositors on a three months' deposit.

Giving an example, the BB official said, if four banks invest Tk 6 lakh in the IIFM and three banks borrow the amount, and if the borrower banks log 12 percent profit in three months, the borrower banks will pay the lender banks their one day's profit calculated on the basis of the 12 percent profit.

The IIFM will be operated from the securities division of the central bank's Motijheel office.

The proposed rules for the new fund market were finalised by the central bank in consultation with the chief executive officers of seven Islamic banks on Wednesday.

In recent times, Tk 32,000 crore to Tk 36,000 crore remains as excess liquidity with the banks. Of the amount, around Tk 3,000 crore to Tk 4,000 crore is with the Islamic banks which they cannot invest and so the amount remains idle.

Besides, the central bank has taken an initiative to amend Islami Bond Rule 2004 so the Islamic banks and financial institutions can participate more in the Islamic financial market.

The Daily Star/Bangladesh/ 23th Dec 2011