The International Islamic Financial Market, a Bahrain-based standards-setting body, issued global guidelines that will provide a universal reference point for Shariah-compliant contracts banks can use to manage funds.
The documentation for unrestricted wakalah agreements will broaden the range of liquidity-management products, Ijlal Ahmed Alvi, the institution’s chief executive officer, told the World Islamic Banking Conference in Singapore today. The aim is to help spur new money-market instruments in which lenders can park some $600 billion of excess cash, he said in an interview.
The initiative is aimed at reducing the industry’s reliance on commodity-backed contracts, which are suffering from limited supply of suitable goods used in such agreements that comply with Koranic principles. Assets in the Shariah-compliant financial-services industry grew 20 percent in 2012 to $1.6 trillion, according to a 2013 stability report published by the Islamic Financial Services Board. That included $1.27 trillion in banking assets and $229 billion of outstanding sukuk.
“The options for liquidity management are still small and limited for banks,” Alvi said in the interview. “The use of wakalah is an important initiative. We are doing regulatory analysis and accounting assessment” that can add to best practices on a bigger scale in more countries, he said.
Islamic law prohibits the payment of interest and bans investment in industries such as gambling and alcohol deemed as unethical. Shariah-compliant bonds, or sukuk, pay returns on assets that comply with religious tenets.
An unrestricted wakalah is a specific contract used by Islamic lenders to manage their treasury operations, a document that defines roles and obligations of principals and agents for matters including due diligence, profit warning, insolvency and contract termination, according to a paper handed out at the presentation.
A murabaha contract used in commodity transactions is a three-party agreement between a customer, a supplier and a financial institution that buys the goods and sells them at a markup.
“We are quite confident on the acceptability of this document,” Kamal Abdelkarim Hassan, manager of treasury and financial institutions at Kuwait Finance House, the nation’s biggest Islamic lender, said in an interview today. “The Shariah scholars have signed off on this document. I don’t foresee any acceptability problem.”
IIFM was established in 2002 by the monetary authorities of Bahrain, Malaysia, Brunei, Indonesia and Sudan, as well as the Islamic Development Bank based in Jeddah, Saudi Arabia, to focus on global Shariah-compliant capital and money markets, according to its website.
Global sales of Islamic bonds climbed 4 percent to $18.2 billion in 2013 from a year earlier, according to data compiled by Bloomberg. The securities returned 0.5 percent this year, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. Emerging-market debt lost 3.4 percent, according to JPMorgan Chase & Co.’s EMBI Global Index.
Alvi said growth in non-dollar sukuk issuance will increase among the Gulf Cooperation Council countries. The Singapore dollar and Chinese yuan will be currencies of choice because of their stable economies and appreciation outlook, he said.