Bahrain-based International Islamic Financial Market (IIFM), a global standard-setting body for Islamic finance has launched the IIFM Master Collateralised Murabahah Agreement.

The global standard document is accompanied by an operational guidance memorandum, said a report in the Gulf Daily News (GDN), our sister publication.

"This much awaited 6th documentation standard from IIFM is based on 'Rahn' or collateral and will provide an alternative avenue to institutions for low risk financing arrangements locally as well as cross-border," IIFM chairman Khalid Hamad Abdul-Rahman Hamad.

"With the publication of this global standard document, institutions of all sizes will be equally comfortable to transact and better utilise their Islamic securities portfolio particularly sukuk.

"Another feature of this master agreement is the potential to make use of tri-party agent for safe keeping as well as marking to market and other such services," he said.

IIFM chief executive Ijlal Ahmed Alvi said this global master agreement has been developed as an additional tool to be used for liquidity management by institutions active in Islamic finance.

"It is the best possible alternative to conventional repo arrangements and will enable the institutions to utilise their idle sukuk or Sharia-compliant portfolio for generating liquidity.

"The master agreement also provides for credit enhancement resulting in better risk management in an environment where the global finance market is generally moving away from clean lending," he said.

Alvi said this standard document has been developed in accordance with the IIFM comprehensive procedure in developing global standards ie consultation with the IIFM Sharia board from the early stages, market consultative meetings, forming a global working group and the appointment of external legal counsel.

The key features of this agreement is that the fund placing institution will have a comfort of having the collateral in case of any eventuality, segregated safe keeping and margin maintenance mechanism to support risk management.

The collateral is taken through a pledge mechanism and envisages that the collateral will be held by a third party custodian to facilitate getting hold of the collateral in case of default or severe impairment of the collateral giving institution's credit worthiness.

"The operational guidance memorandum for the master collateral murabahah agreement is one of the unique features of IIFM efforts to enhance the development of the Islamic finance industry. The industry will find this memorandum very useful in explaining how the standard is to be used and in addition to that it provides very comprehensive recommendations," said Alvi.

IIFM deputy chairman and ABC Islamic Bank managing director Naveed Khan said this standard fills the acute gap and removes a disadvantage for the Islamic finance industry compared to its conventional counterpart.

"In as much as re-use is not a feature, it retains its full Sharia-compliant flavour. I am hopeful that both existing and new users will find the standard useful in bridging their liquidity needs".

Clifford Chance partner Habib Motani said this new standard document provides the Islamic financial market with a significant new tool for addressing the increased regulatory focus on liquidity and collateral and Clifford Chance is delighted to have been able to contribute to its development.

IIFM Sharia head Dr Ahmed Rufai said IIFM has achieved yet another milestone in its quest to achieve the ultimate objective of advancing the Islamic financial industry globally through its pioneering role in producing Sharia-compliant standard documentation with clear objective of providing harmonisation, best practices, transparency and clarity for sound business activities.

"This MCM agreement has been characterised with a number of positive features hardly to be found in other Islamic finance master agreements, among these crystal features is the inclusion of Sharia standards as footnotes for the purpose of clarification, authentication and acceptance of all the related transactions." - TradeArabia News Service