Kuwait's central bank denied a request by Islamic lenders to grant them exceptions from liquidity ratio requirements and allow for the withdrawal of excess liquidity, a newspaper reported on Tuesday.

Kuwaiti Arabic daily Al-Rai said this was the second time the country's central bank rejected such a proposal - a move some banks say put them at a disadvantage to conventional banks.

The central bank intervenes in the money market to withdraw excess liquidity at banks through bonds issued by and received from the banks on demand.    

But Islamic institutions do not deal with traditional bonds and do not benefit from liquidity management tools available to conventional institutions.   

A lack of liquidity tools is seen as one of the key challenges to the emerging $1 trillion Islamic finance industry, with sharia banks handicapped partly due to the limited range of products they can invest in.

Islamic banking is one of the world's fastest growing financial sectors, and it has attracted more attention in the aftermath of the global financial crisis as investors are increasingly looking for alternative, ethical ways of investing.   

Kuwait's central bank governor Sheikh Salem Abdul-Aziz Al-Sabah said in September the state was saturated with Islamic banks, saying that there were five Kuwaiti Islamic lenders registered with the central bank and five conventional banks. - Reuters