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.