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IIFM to launch template for profit-rate swaps

Manama, November 28, 2011

International Islamic Financial Market (IIFM) is set to launch a template for Sharia-compliant profit-rate swaps, designed to help in hedging risk in frequent cross-currency transactions next year, said its chief executive.

Ijlal Alvi said IIFM, a global body which works to standardise Islamic finance products, was close to finalising the template, which will standardise documentation in the use of profit-rate swaps among Islamic institutions.

'That standard documentation for the profit-rate swap product will be available soon. We would generally keep the first quarter for now,' Alvi said in an interview with Reuters in Bahrain.

'We have tested with some core banks already and got their views on it. Now it's really just more about getting the Sharia (approval by Islamic scholars).'

'There is a need to control risk, such as currency volatility for a sukuk issued in another currency or a venture capital deal in which the balance sheet is another currency. We're seeing such a pipeline, for instance, of sukuk in recent days so the need for profit-rate swaps is also coming in,' Alvi said.

Profit-rate swaps are intended to achieve the economic effect of interest-rate swaps, through the use of underlying Sharia-compliant undertakings and mark-up sale transactions.

Advocates say Islamic financial institutions have long needed the hedging product to deal with mismatches between the fixed-rate profile on some of their assets and variable-rate profile on their liabilities, and vice versa.

Sukuk issuance has outpaced the conventional bonds industry in recent months and is expected to remain strong into the first quarter of 2012, as borrowers seek better pricing and alternative funding amid the global debt crisis.

Last year IIFM launched a broader Islamic derivatives contract template, known as the Tahawwut Master Agreement, to provide Islamic institutions with a simpler format for risk management that has been approved by Sharia scholars.

But the document has been slow to catch on in some parts of the industry, where it is viewed by some as unwieldy.

Still, Alvi said the need for hedging products would become increasingly apparent as the nearly $1 trillion Islamic finance industry continued to grow rapidly, and as standardised documentation approved by Sharia scholars became available.

He also said his organisation would look to create a standardised wakala agreement in 2012. Wakala is an agency agreement in which one firm accepts funds from another to invest on its behalf in a Sharia-compliant manner.

IIFM is putting together a first draft of the document following a consultative meeting with banks, scholars and law firms, and will provide it for wider feedback.-TradeArabia News Service




Tags: International Islamic Financial Market | Sharia | transactions | swap | template |

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