Islamic finance body IIFM to develop trade, corporate finance contracts

The Bahrain-based International Islamic Financial Market (IIFM) will develop contract templates for sharia-compliant corporate finance and trade finance transactions, as the industry body expands its mandate, its chairman said on Monday.

IIFM, a non-profit which develops specifications for Islamic finance contracts, is aiming to double the number of its standards by as early as next year.

The new standards would help broaden the scope of IIFM, as the bodywork to harmonise industry practices, said Khalid Hamad, executive director of banking supervision at Bahrain’s central bank and IIFM chairman.

“Such an initiative is a strategic step by the IIFM board to meet the demands of the industry,” he told a seminar in Bahrain.

Trade finance has remained a marginal business for Islamic banks even as other areas have boomed in recent years, partly because of a lack of scale and expertise compared to larger and more established Western banks.

Last month, the IIFM launched its sixth standard covering collateralised “murabaha” agreements, which serve as an alternative to repurchase agreements, a key liquidity management tool largely absent in Islamic finance.

The IIFM is also studying the impact of a G20 initiative that calls for the introduction of central clearing for over-the-counter derivative trades.

This could prove problematic for Islamic banks, as some of their transactions might not be accepted by such clearing-houses, while margin requirements would entail the charging of interest, which is banned in Islamic finance.

“Specifically, it is worth exploring if a sharia compliant CCP [central clearing Counterparty] structure is possible,” said Hamad.

The IIFM has previously launched standard contract templates for Islamic profit rate swaps as well as hedging and treasury transactions. It is working on standards for cross-currency swaps, foreign exchange forwards and Islamic bonds.

The body, was started operations in 2002, was founded by the Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre.

(Gulfnews.Com / 02 December 2014)

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Islamic finance body IIFM launches collateralised murabaha standard

The Bahrain-based International Islamic Financial Market (IIFM) has launched a standard contract template for collateralised murabaha transactions, aiming to boost use of a sorely needed liquidity management tool for Islamic finance institutions.

The standard will serve as an alternative to repurchase agreements, which are common money market tools used by conventional banks but are largely absent in Islamic finance.

It is the sixth standard issued by the IIFM, a non-profit industry body which develops specifications for Islamic finance contracts.

"Finding a sharia-compliant alternative to repurchase agreements has become absolutely essential and imperative to help meet the liquidity requirements of the industry, and the collateralised transaction is at present the best alternative," chief executive Ijlal Ahmed Alvi told Reuters.

Collateralised murabaha deals are already taking place, but the agreement will help to standardise them while attracting more Islamic banks that have been awaiting guidance, Alvi said.

Several banks want to have the collateralised murabaha format approved by their own sharia boards, so they can have it in place alongside existing tools in case of any potential liquidity squeeze, he added.

"Clean lending has become more difficult, especially for the smaller Islamic banks, and this helps to keep as a contingency."

The new template is accompanied by detailed guidance notes, the first the IIFM has published, which clarify issues such as margin maintenance and custodial services, Alvi said.

Sharia-compliant alternatives to repos are scarce: Malaysia and Bahrain have their own approaches but these are approved at the domestic level and limited to local-currency collateral.

In the United Arab Emirates, the first collateralised murabaha transaction occurred in 2011 between National Bank of Abu Dhabi and Abu Dhabi Islamic Bank.

REPO

Conventional repos allow institutions to lend out assets for short periods to generate liquidity; this is disallowed in Islamic finance as it entails the charging of interest. Collateral is often lent out by custodians, a practice known as rehypothecation, which also contravenes Islamic principles.

Even the phrase "Islamic repo" is problematic among scholars who fear the instruments will simply replicate conventional financial products without addressing a real economic need.

Collateralised murabaha is a cost-plus profit arrangement which tries to avoid such issues by having the financier buy the asset at market value and immediately sell the asset to the customer for a mark-up on a deferred payment basis.

Because the mark-up price is agreed up front by both parties, this addresses the element of ambiguity, or gharar, a key principle in Islamic finance.

Transactions can be secured by any sharia-compliant assets, including equities and sukuk (Islamic bonds). The standard expressly forbids rehypothecation.

The IIFM has previously launched standard contract templates for sharia-compliant profit rate swaps as well as hedging and treasury transactions. It is working on standards for cross-currency swaps, foreign exchange forwards, and several common sukuk structures, including convertible and exchangeable sukuk.

The body started operations in 2002, founded by the Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre.

The central bank of Kazakhstan plans to join the IIFM, whose membership is expected to grown alongside the number of standards issued, said Alvi. 

(Reuters / 16 November 2014)

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Islamic Finance Body IIFM Eyes First Sukuk Standard

The Bahrain-based International Islamic Financial Market (IIFM) will develop its first standard contract template for Islamic bonds, and aims to double the number of its standards as early as next year, its chief executive told Reuters.

A standard for leasing-based sukuk will be developed first by the IIFM, a non-profit industry body which creates specifications for Islamic finance contracts, to help harmonize industry practices, said chief executive Ijlal Ahmed Alvi.

“Our aim is to come up with more standards — that is the focus we are trying to push for. We have five standards now and we hope to double that for next year.”

The move comes after a consultation meeting in Dubai this week which identified a need for guidelines covering theijara sukuk structure, a Shariah-compliant sale and lease-back contract, as a priority.

Alvi said a working group would be established after the IIFM’s board meeting in May, and it would also study other common sukuk structures such as mudaraba, wakala and musharaka, as well as convertible and exchangeable sukuk.

Sukuk issuance globally reached $117 billion last year from a total of 811 issues, of which 175 where based on the ijara structure, according to data from Zawya, a Thomson Reuters company.

The ijara sukuk standard could be ready by the end of this year at the earliest, although this would depend on the working group’s schedule, Alvi added.

The working group would include representatives from a wide range of Islamic banking institutions including the Jeddah-based Islamic Development Bank (IDB), as well as the International Monetary Fund, he added.

While ijara sukuk are popular among corporate issuers, the absence of standard documentation has spawned different versions which can limit their acceptability among Islamic investors. A general lack of uniformly accepted standards in Islamic finance has slowed global growth of the industry.

The new sukuk standard will seek to address a variety of issues including primary market issuance and the use of special purpose vehicles, Alvi said.

In the past two years, the IIFM has launched standard contract templates for Islamic interbank transactions and profit rate swaps.

It is currently working on standards for cross-currency swaps, foreign exchange forwards and collateralized murabaha, while also consulting on credit support arrangements in Islamic finance contracts, said Alvi.

The IIFM started operations in 2002, founded by the IDB and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Center.

(Jakarta Globe / 23 April 2014)

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New rules for syariah banking soon

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)

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IIFM reviews key Islamic finance initiatives

MANAMA: Bahrain-based International Islamic Financial Market (IIFM) continues to spearhead initiatives for Islamic capital and money market (ICMM) standardisation, board members were told at a meeting.

Hosted by ABC Islamic Bank at its office, the IIFM's 29th board of directors meeting was attended by directors and senior representatives from Central Bank of Bahrain, Bank Indonesia, Central Bank of Sudan, Autoriti Monetari Brunei Darussalam, Labuan Financial Services Authority (Malaysia), Islamic Development Bank, ABC Islamic Bank, Kuwait Finance House-Bahrain, Standard Chartered Saadiq, Mashreq Al Islami and Credit Agricole Corporate and Investment Bank.

IIFM chairman Khalid Hamad presided over the meeting which reviewed progress on ongoing initiatives related to collateralised murabaha liquidity management documentation and both Islamic cross currency swap and Islamic foreign exchange forwards.

The board also appreciated the work undertaken by IIFM and its partner International Swaps and Derivatives Association for creating legal certainty with the soon-to-be-issued legal opinion on English Law which will greatly assist the market in further implementation of the 'Tahawwut Master Agreement'.

The publication of IIFM's documentation standards and guidelines for Islamic hedging and liquidity management was also welcomed.

The directors reaffirmed their earlier decision on the sukuk standardisation initiative by IIFM.

IIFM chief executive Ijlal Ahmed Alvi said the organisation has already started the consultative process.

He added that the IIFM is considering not only developing guidelines which will help the primary and secondary market but also the development of sukuk structure and documentation standards.

(Gulf Daily News / 01 Jan 2014)

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