Alternative liquidity facility: The Bank of England’s Non-interest solution for UK Islamic Banks
Shakeel Aslam · Posted on: December 22nd 2025 · read
The Bank of England (Bank) has taken significant steps to ensure a level playing field for Shari’ah-compliant banks operating in the United Kingdom, primarily through its Alternative Liquidity Facility (ALF).
As detailed in a presentation by Victoria Saporta, the Bank's Executive Director, Markets, at a recent FT Live and Islamic Development Bank conference, this facility, which recently more than doubled in size, is regarded as a success in central banking innovation.
For CFOs, Heads of Tax, and Non-Executive Directors within the UK financial sector, understanding the ALF is key to appreciating the regulatory support mechanisms and growth of the domestic Islamic finance sector.
The Regulatory Challenge for Islamic Banks
The Bank of England serves as both the central bank and the prudential regulator. A critical challenge for Shari’ah-compliant banks has been meeting liquidity requirements. All banks regulated by the PRA must maintain a buffer of High-Quality Liquid Assets (HQLA). For conventional banks, the most liquid form of HQLA is typically interest-bearing "reserves" deposited with the Bank.
However, Shari'ah-compliant banks cannot hold these interest-bearing reserves or other interest-bearing assets, such as gilts, due to religious restrictions. This created a structural disadvantage in meeting regulatory requirements.
Mechanism: The ALF accepts deposits from participant banks. These deposits are backed by a return-generating fund composed of high-quality eligible assets, including Islamic Development Bank sukuk instruments.
Sukuk Defined: Sukuk are Shari’ah-compliant financial instruments that function similarly to conventional bonds.
Returns: Returns generated from the backing fund are passed back to the participant depositors in the form of profit, not interest.
Growth and Impact of the ALF
"Since its introduction, the Bank of England's Alternative Liquidity Facility has seen strong uptake from participants. Its success is evident in its impact on the UK standalone Islamic banks."
- HQLA Stabilisation and Growth Data from UK standalone Islamic banks shows that their High Quality Liquid Assets (HQLA) have stabilised and grown steadily since the ALF was launched in 2021.
- Facility Expansion This year, the Bank expanded the facility for the first time. The size of the facility was increased from £200 million to £550 million—more than doubling its capacity—with the Bank purchasing additional IsDB sukuk to back the expansion.
- Facility Utilisation The usage chart demonstrates a sharp increase in deposits coinciding with the expansion, with total participant deposits and the Bank's co-deposit reaching the new capacity in mid-2025. The Bank places a co-deposit to ensure any residual capacity is fully utilised.
The successful development and expansion of the ALF highlights the Bank of England's commitment to adapting its market operations to accommodate the specific needs of diverse financial sectors, ensuring the overall resilience and inclusivity of the UK financial system.
