Initially we had hoped Islamic banks might be able to use our normal reserves accounts, by agreeing to forgo any interest paid – as many observant Muslim customers do on their retail bank deposits. But on further investigation this proved unworkable: reserves accounts were too intimately bound up with the concept of interest, given their core role in implementing monetary policy. And the disparity in return offered to Islamic and non-Islamic banks at higher levels of Bank Rate would have left a decidedly uneven playing field. Work therefore commenced in 2015 to assess the feasibility of establishing a standalone noninterest based facility. Recognising the limits of the Bank’s knowledge of Islamic finance, we drew 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  on the expertise of fellow central bankers across the Middle East and Asia, including those from Bahrain, Malaysia and the UAE. In light of that research, we triaged a number of potential models to gauge which might fit best with the specificities of the UK market, legal and regulatory environment. We consulted publically on those options in 2016, and again in 2017 to fine tune our intended approach.18 Today, after a long and comprehensive process, I’m pleased to announce that the Alternative Liquidity Facility will be open for business from the first quarter of 2021.
The rate of return on the deposit (6) is based on the rate of return on the portfolio backing it, net of hedging and other operational costs; and on maturity the return from the fund is paid over to participating banks, and the principal amount is returned or rolled over. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10