Islamic certificates of deposit in the UAE stood at Dh12 billion ($3.27 billion) at the end of the first quarter, the central bank governor said on Thursday, as the industry seeks to manage its excess liquidity.

The central bank launched its Islamic CD programme last November.

Islamic bank deposits for the country's eight Islamic banks reached Dh198 billion at the end of 2010, representing 18.7 percent of total banking deposits, said Sultan Nasser al Suweidi at an Islamic banking seminar at the central bank.

Assets and liabilities stood at Dh269 billion, representing 17 per cent of total UAE assets and deposits.

'Figures of Islamic banks are impressive but there are some challenges,' he said, citing the lack of short-term liquidity management options as one of them.

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 religion's ban on interest rules out most interbank tools.

The UAE central bank plans to introduce a repurchase facility for Islamic lenders in the coming months, its treasury head said in May.

Abu Dhabi Islamic Bank Chief Executive Tirad Mahmood said  the bank has an ongoing programme to buy the Islamic CDs as part of its liquidity management strategy.

'We are one of the most liquid banks in the country,' he told reporters at the same event. 'When we have excess liquidity, we deploy it with the central bank.'

While Islamic banks welcome the central bank's Islamic CD programme, executives said imore needs to be done.

'Over liquidity has always been a problem. Where do we deploy or invest it is a question,' said Nabil Tayeb Khoory, head of Islamic banking at Attijari Al Islami, the Islamic arm of Commercial Bank of Dubai. 'The CDs are one tool but we need more products.”

There are eight fully-fledged Islamic banks operating in the UAE, although most banks in the second largest Arab economy have an Islamic window alongside their conventional operations. – Reuters