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29 March 2024

Islamic derivative deal by 2010

Published
By Reuters

The first template for over-the-counter Islamic derivative contract will be launched this year or early next, one of the institutions involved in its creation said yesterday.

The contract is expected to pave the way for quicker and cheaper Islamic risk management and more frequent cross-currency transactions.

The template had initially been expected to be launched early this year but Ijlal Ahmed Alvi, Chief Executive Officer of the International Islamic Financial Market (IIFM), said there were issues to be ironed out.

"It's a completely new instrument. That's why we have to go through the whole exercise," Alvi said on the sidelines of an Islamic finance conference in Malaysian capital Kuala Lumpur.

"We have done the consultative work. Now what we are waiting for is the Shariah meeting... some time in December," Alvi added.

Islamic scholars at the meeting have to sign off on the contract before it can be launched.

Scholars are split on the legitimacy of derivatives; some see them as permissible instruments to hedge risks but others dismiss them as speculative transactions, which Islam forbids.

The IIFM, an industry body backed by the central banks of several Muslim countries, has been working with the International Swaps and Derivatives Association (ISDA) on the contract.

Once in place, the new Islamic derivatives contract is expected to initially attract at least 150 players.

"We have huge demand, at least 150 institutions and many more are basically silent prospects," Alvi said. OTC derivatives are privately negotiated deals between investors and counterparties. Shariah financial institutions have limited access to derivative products mainly because Islamic law requires the underlying assets in any transaction to be tangible, virtually excluding most of the mainstream derivatives instruments.

The issue of risk management has become more urgent in the past few years following the financial crisis, which has dried up liquidity, and has prompted market participants, regulators and scholars to debate the use of derivatives by Islamic investors such as commodity-based ones.

"Any Islamic finance market participant faces the same [general] conditions as any other market; they need to react to volatility in exchange rates, for example. The sector is more aware of this need," Peter Werner, director of policy at ISDA, told a news agency.

The total notional amount of OTC deals outstanding was nearly $592 trillion (Dh2.17 zillion) at end of 2008, according to the Bank for International Settlements.

 

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