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Monday, 28 November 2011

First Islamic Interbank Benchmark Rate Launched


Giving a boost to the booming Islamic finance, a consortium of banks and financial institutions launched Tuesday, November 22, the industry’s first international Islamic interbank rate.
"The establishment of the IIBR marks an important milestone in the maturation of Islamic money markets by providing an international reference rate for interbank transactions," Nasser Saidi, chairman of the committee which sets the rules for the new system, told Reuters.
The Islamic Interbank Benchmark Rate (IIBR) will be used as a basis for pricing a wide range of Islamic financial instruments, including sukuk (Islamic bonds), corporate financing and common Islamic treasury agreements.
It is based on rates contributed by 16 Islamic banks and Islamic sections of conventional banks.
Tenors for IIBR will range from overnight to one year.
The new system is based on the rate of return on capital used by Islamic banks, representing the average profit rate at which bids are made for Shari`ah-compliant interbank transactions, such as murabaha and wakala deals, between top Islamic financial institutions.
Murabaha is a cost-plus-profit structure used for funding, while wakala involves the use of an agency agreement in which one firm accepts funds from another to invest on its behalf in a Shari`ah-compliant manner.
The new system addresses a source of tension within the Islamic finance industry, which is estimated to have reached $1 trillion in assets.
Islam forbids the use of interest in any transaction, but the industry has long used the London Interbank Offered Rate (LIBOR), a system of interest rates, as a benchmark in the absence of Shari`ah-compliant alternatives.
Islamic banking, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.
With estimated 300 Islamic banks and financial institutions worldwide, the industry expands by 15-20 percent a year and entered recently new markets from Australia to South Africa.
Western financial institutions, including Citigroup, Deutsche Bank, HSBC and UBS, are increasingly offering Islamic products.
Guideline
The new system would for now remain a guideline that banks could voluntarily choose to adopt.
"We don't have the regulatory authority to compel banks to use IIBR,” said Khairul Nizam, deputy secretary general of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which sets standards for the industry.
“But as the contributing banks are among the top Islamic institutions, we are hopeful that as they use it, it will set IIBR as a benchmark.
"Rather than this being something forced, we want non-contributing banks to want to start using it, and we are hopeful that they will."
Nizam added that the IIBR committee, which includes AAOIFI, was in discussions with Malaysian banks to have them contribute rates to the pool, to give IIBR a greater global reach beyond the Gulf.
Malaysia has its own Islamic interbank rate system based on contributions from local Islamic institutions in the local currency, the ringgit. IIBR is based on the US dollar.
Some bankers believe the launch of IIBR shows Islamic finance is finally maturing to a level at which it can compete broadly with conventional finance -- at a time when turmoil in global financial markets has raised questions about risks in the conventional system.
Because Islamic finance bans pure monetary speculation that is not based on an underlying asset, its proponents present it as a less risky, more stable alternative to conventional finance.
But it still faces big obstacles to widespread adoption, including a lack of tools that commercial banks and central banks can use to adjust liquidity.
Sheikh Muddassir Siddiqui, a scholar on the committee's board and partner at law firm SNR Denton in Dubai, believes that adoption of IIBR by a wide range of Islamic institutions may take some time as banks become comfortable with the new system.
"For a fixed-price contract, such as murabaha, I think we'll see people using IIBR immediately," he said.
"For floating-rate agreements, such as in some lease (ijara) contracts, the adoption may take a little longer as people would need to build the confidence and the comfort level for fixing the cost of financing on future dates. It is natural."

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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