Multinational non-profit organisation the International Islamic Financial Market (IIFM) is developing template trade finance and corporate finance contracts to make it easier for financial institutions to process transactions without breaching sharia law.
Islamic banks have struggled to compete with their Western counterparts when it comes to trade finance, partly due to a historical lack of expertise and partly due to uncertainties over how these areas can operate in line with religious rules.
The Bahrain-based IIFM recently introduced a new standard that covers “murabaha” agreements – a alternative to repurchase agreements – plugging a gap in Islamic finance by creating a much-needed liquidity tool. In the past in has also rolled out standard contract templates for use in profit rate swaps, hedging and treasury transactions.
The latest sharia-compliant templates aim to “harmonise” international industry practices, according to Khalid Hamad, chairman of IIFM and executive director of banking supervision at Bahrain’s central bank.
“Such an initiative is a strategic step by the IIFM board to meet the demands of the industry,” he said.
Next on the agenda for the IIFM are cross-currency cross-currency swaps, foreign exchange forwards and Islamic bonds. It is also exploring the implications of a G-20 initiative pushing for the introduction of central clearing for over-the-counter derivative trades, which could prove troublesome if these clearing houses refuse to accept transactions without interest payments. Charging interest is forbidden under sharia law.
“Specifically, it is worth exploring if a sharia compliant CCP (central clearing Counterparty) structure is possible,” commented Hamad.
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