Unified standards for commodity Murabaha transactions introduced

Standardisation and unification of rules for Islamic financial products has become a core factor in elevating the Islamic banking system into the next stage, according to market experts.

Introducing the first Shariah-compliant master agreements for treasury placement (MATP) in Dubai yesterday, several experts in Islamic finance said this move would support the expected high growth rates in Islamic banking and financial services around the world.

The initiative introduces unified standards for commodity Murabaha transactions, including master Murabaha agreement, master agency agreement for purchase of commodities and commodity purchase letter of understanding.

The MATP aims to standardise and unify the core of Murabaha practices for all Islamic banks, Islamic arms of conventional banks and dealers in the markets.

"The response to the initiative was tremendous among leading banks around the world. JPMorgan and Standard Chartered are among the first banks studying the initiative and we expect the agreement to be operational within two weeks," said Ijlal Ahmed Alvi, CEO of the International Islamic Financial Market (IIFM), an entity created by the central banks of Islamic countries to help establish, develop, self-regulate and promote Islamic capital and money market.

The initiative was prepared by IIFM, Central Bank of Bahrain and Dubai International Financial Centre (DIFC), along with 40 other participants. "Murabaha is the most common practice in global Islamic finance. We estimate it at 20 per cent of the total assets under management by Islamic financial institutions. Currently, total assets have reached $700 billion (Dh2.5 trillion) and we expect growth to continue at 20 per cent annually. This will increase the volume in Murabaha transactions and accordingly increase the importance of introducing standards and unified documentation of Murabaha deals," Alvi said.

Despite such agreements being in the markets for the past three decades, Nik Thani, executive director of Islamic Finance at DIFC, said the unified documentation will create more confidence in this fast-growing area.

"There are between 20 and 30 styles of Murabaha transactions in the global markets with a lot of differences – but not critical ones – due to differences among Shariah advisory boards in Islamic banks. The initiative will help overcome these differences. We expect the total assets under management in Islamic financial institutions to reach $1trn by 2010 and this needs wide agreement on core standards of different Islamic products," Thani said.

"Islamic finance is not about making money only, but making money in ethical and responsible ways, and Shariah advisory boards represent a second layer for corporate governance. What we need now is to unify rules and regulations governing the core practices in Islamic institutions and this will help take the industry to its next stage of development," he said.

He said introducing unified standards for Murabaha in commodities would create a platform to increase confidence in Islamic finance. "There are three main issues that Islamic institutions were working on during the past decade, including transparency, standardisation and human resources. With such initiatives coming, we are going to have a new stage in Islamic finance. We expect new regulations in the global financial sector after the financial crisis. Islamic banks had banned speculative financial practices and restrictions on these areas will benefit them. This will create the need for unified standards for other Islamic products, such as Sukuk."

Nasser Al Shaali, CEO of the DIFC Authority, said Islamic finance could avoid the negative fallouts of the current global financial crisis and this would create more confidence in the sector during the next few years.

"Despite global markets declining by 70 per cent, the Dow Jones Islamic Financials Index rose by 4.75 per cent during the third quarter this year. This reflects strong fundamentals of the Islamic financial system," he said.

Qudeer Latif, partner at Clifford Chance, legal consultant in the project, said the MATP would be acceptable in any global jurisdiction. "We looked at the core of Murabaha practices and these standards for Murabaha agreements will be accepted in any global financial market. There is room to introduce amendments to meet requirements of some markets, but this will not affect the core of the Murabaha agreement," he said.

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