Banks in the UAE will be able to borrow money overnight from the central bank from 15 April.

It is a move that will help financial institutions better manage their liquidity and improve confidence in the country’s banking sector.

The new Interim Marginal Lending Facility (IMLF) allows banks to use various assets as a form of collateral to borrow short-term money from the central bank.

Details on how Islamic banks can borrow overnight in a sharia-compliant way will be released in the “coming weeks”, says a letter from the central bank issued on 8 April.

Most central banks in developed markets already offer overnight lending to their banks as a means of helping the sector maintain stable levels of liquidity.

Typically, the amount of money held by banks changes during the day and banks can sometimes face a shortfall in liquidity at the end of the day. Financial institutions can keep their liquidity levels topped up by borrowing from other banks or from the central bank.

Access to central bank overnight loans can be particularly useful during economic downturns, when banks are reluctant to borrow from each other due to being worried about the creditworthiness of each other.

A lack of interbank lending helped fuel the global financial crisis in 2007-08.

The rate charged on central bank lending is often taken as reflective of the country’s economic health. The more expensive the overnight loans become, the higher the interest rates charged on bank loans to consumers.

Under the new UAE facility, banks can borrow a minimum of AED10m and the rate charged is the Central Bank repo rate plus 100 basis points.

Eligible collateral that can be used to access funds include bonds or sukuk (Islamic bonds) issued by UAE governments both at federal and local level, UAE government-related entities, foreign governments and some corporates.