Business & Finance Club - Dubai : The United Arab Emirates' central bank will launch Islamic certificates of deposit by the end of the year to help the country's Islamic banks manage cash, a senior banker at Standard Chartered Saadiq said on Monday.

Afaq Khan, chief executive of StanChart's Islamic banking unit, said test transactions could take place as early November.   

"It will be a tool to absorb the excess liquidity in the Islamic money market," Khan said on the sidelines of an Islamic finance conference in the UAE capital.

A lack of liquidity management tools is seen as one of the key challenges to the emerging Islamic finance industry, which has close to $1 trillion worth of assets globally.   

The move will make liquidity management more effective for the UAE's Islamic banks, which now lack access to the central bank as using conventional CD auctions is not in line with sharia, or the Islamic law.   

Islamic finance accounts for 16 percent of the UAE's banking assets, compared to just 5 percent for Pakistan which already has a local currency Islamic treasury in place, said Khan.

Standard Chartered Saadiq is one of the banks on a liquidity management committee set up by the central bank this year. The group is also looking at an Islamic repurchase facility.   

The new Islamic CDs will be sharia-compliant, based on a commodity murabaha concept and will be offered in daily auctions.   

Under a commodity murabaha deal, an Islamic bank makes a profit on difference between buying and selling any commodities except for gold and silver. This allows them to avoid charging interest, which the religion forbids.

Initially, the CDs will be available only to fully Islamic banks and then extended to the Islamic banking units of other commercial banks.