KUALA LUMPUR: Syariah standardisation to ensure stronger financial stability will improve by 2015, thanks to efforts by standard-setting bodies to provide stricter guidelines for the better running of Islamic banking and finance sectors, an industry expert said.
The need to ensure the capability of the financial system to withstand economic and financial shocks are the core objectives of such financial stability, International Islamic Finance Market (IIFM) CEO Ijlal Ahmed Alvi said in an interview with The
Malaysian Reserve.
“A clear standardisation and regularisation is needed, in order for Islamic banking and finance to stay competitive,” said Ijlal.
Ijlal said credit support agreement and cross currency swaps are among the key aspects to be addressed as soon as possible.
“In the next two years we can expect at least four to five new standards in Islamic finance of which the currency side is one of them.
“We are currently working on the currency side, drafting standards and clauses related. It is half-way done,” he said.
Ijlal said for example Islamic banks’ retail product offerings tend to be usually fixed rate murabaha-based pro-ducts to customers, while the corporate customers are offered facilities based on floating benchmarks.
“Thus from the banks’ point of view there is a liquidity mismatch with Islamic deposits being much shorter tenure (3-6 months) compared with Islamic investments of longer maturity, and also fixed versus floating rate exposure.
“Corporate clients also require a more sophisticated product set to manage their own risk-positions through the banks.
“Therefore, Islamic banks require Islamic tools to manage interest rate risk and foreign-exchange (FX) risk. Hence the development of the profit rate swap and the Islamic forward FX contract,” Ijlal said.
Ijlal said there are a number of financial institutions that offer Syariah-compliant hedging solutions for the mentioned risks, however, the standardisation of the documentation is still not complete compared to conventional contracts which has resulted in syariah-compliant hedging remaining unattractively priced as compared to conventional hedging products.
Besides, he said there is an urgent need for a regulatory, supervisory and Syariah framework to be put in place across all markets in order for the sector to realise its fullest potential.
“Stronger standards for corporate governance, transparency, disclosure , accountability , market discipline, risk management and customer protection are crucial to increase market penetration and confidence,” he said.
Moreover, over-reliance on murabaha also needs to be addressed, Ijlal said.
“This is a big challenge indeed. We have to work to create an alternative to murabaha. We are in an evolving nature and this is something that needs to be addressed which involves quite a number of contractual obligations,” he added.
Murabaha is one of the most common modes used by Islamic banks. It refers to a sale where the seller discloses the cost of the commodity and amount of profit charged.
The mechanism of Murabaha is that the bank purchases the commodity as per requisition of the client and sells to him on a cost-plus-profit basis.
“Going forward, Islamic real estate investment trust (REIT) is another product that we are looking at in coming years.
“At the moment IIFM have only a few in Malaysia, Singapore and Dubai. We are looking to expand it further,” he said.
(Free And Independent News / 20 Jan 2014)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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