DHAKA/SYDNEY, June 3 (Reuters) - Bangladesh's central bank is seeking to amend rules on its existing Islamic bond (sukuk) programme to broaden its use and allow for a sovereign issuance by the government, enhancing the prospects of Islamic finance in the country.
Bangladesh, a majority-Muslim country of 160 million, has developed Islamic finance with marginal regulatory support but a lack of Islamic capital market tools are limiting the industry's expansion.
A request for the amendments was now being considered by the finance ministry, which would allow sukuk to be used as a money market as well as a fiscal instrument, the Bangladesh central bank governor's spokesman A.F.M. Asaduzzaman told Reuters.
"Issuance of sukuk by the government is one of the major considerations in the proposed amendment," Asaduzzaman said.
The central bank has a small sukuk programme backed by legislation dating back to 2004, which issues short-term paper to help Islamic banks manage their liquidity, but a wide range of tenors is not available and there are no corporate sukuk.
The proposal comes after a report by the Malaysia-based Islamic Financial Services Board (IFSB) highlighted the need to develop sharia-compliant funding instruments such as sukuk in the south Asian country.
The IFSB report said a sharia-compliant lender of last resort facility and an Islamic deposit insurance should be developed in Bangladesh to support an Islamic finance industry which has doubled in size in the past four years.
The central bank is currently developing a lender of last resort framework for the entire banking sector which is expected by December of this year, with a sharia-compliant equivalent to be developed afterwards, Asaduzzaman said.
Islamic deposit insurance, however, was not under consideration with Islamic banks currently covered under the existing scheme managed by the central bank, he added.
The IFSB lists Bangladesh as one of a handful of countries where Islamic banking has systemic importance, an industry which follows religious principles such as a ban on interest and monetary speculation.
The country was gripped by political turmoil leading up to an election in January, with economic growth expected to slow to less than 6 percent in the financial year. In the previous year, the economy grew by 6 percent. (Editing by Kim Coghill)