Sunday, August 22, 2010

Bloomberg: Repos for Sukuk Planned to Expand Shariah Market Trading

The International Islamic Financial Market, founded by the central banks of Bahrain, Indonesia and Malaysia, plans to create Shariah-compliant repurchase agreements to help Islamic banks manage funds and boost trading.

The IIFM, a Bahrain-based standards-setting body for Islamic markets, wants to introduce repos that don’t violate the religion’s ban on interest. It has proposed allowing third parties to act as intermediaries between buyers and sellers of sukuk used as collateral for short-term funds, reports Bloomberg (17 Aug 2010).

Regulators from Bahrain to Malaysia are trying to expand products available to Islamic banks and borrowers. The repurchase agreements recommended by the IIFM would use a profit rate, unlike non-Shariah repos, where traders post securities as collateral for cash and agree to buy them back at a specified price and date, earning or paying the difference as interest.

If “banks don’t have an option like an alternative repo tool, then their balance sheets remain tied up,” IIFM Chief Executivei Officer Ijlal Ahmed Alvi said in an Aug. 15 interview from Manama, Bahrain. “A repo tool would definitely help.”

Demand for services complying with Shariah law is increasing about 15 percent annually, according to the Kuala Lumpur-based Islamic Financial Services Board, another standards body for the industry, which oversees about $1 trillion of assets. Holdings may almost triple to $2.8 trillion by 2015, the IFSB estimates.