The IIFM reference paper on I'Aadat Al-Shira'a provides a basis in terms of finding a widely acceptable and market based solution which will play a major role in liquidity management as well as the creation of a more active sukuk secondary market.

The paper explores the concepts and structuring possibilities of an Islamic alternative to repo and collateralization based on the Murabaha, whose authors include Ismail Dadabhoy, executive director-head of Islamic finance at UBS Investment Bank, Dubai and chairman of the IIFM "IS" working team, and Habib Motani, partner in the London-based international law firm, Clifford Chance LLP, and member of the IIFM "IS" working team.

The team leader, Dadabhoy could not be more fit for purpose. Before he found Islamic finance in the mid-1990s, Dadabhoy was one of the top repo traders in the City in London, and acquired an international reputation in this respect.

Ijlal Alvi, CEO of IIFM, commenting on the importance of the paper said, "The lack of liquidity management tools, particularly a repo-like product, is a challenge that has been faced by the Islamic finance industry for some time. IIFM initiated the process with the assistance of the working team consisting of leading practitioners from the industry to find a solution or identify the key factors which may eventually lead to the development of a product which Islamic financial institutions can use for their short-term liquidity management requirements".

Dadabhoy is a pragmatist who relishes challenges. "Finding a solution for repo alternative product that satisfies Shariah while also being acceptable to the general market," he explained, "has been a real challenge. As an ex repo trader, I know how important this product is to the short term and fixed income traders. I am convinced wider use by the market of I'Aadat Al-Shira'a will add liquidity in the system in terms of cash funding and liquidity float of sukuk. It will "oil" the wheels for efficiency and be a boost for sukuk".

The approach of the working team has been catchall. According to Motani, "Various different approaches have been seen in the market up to now. This paper will serve to assist the market in developing a consensus approach".

The IIFM has thus far issued three standardization initiatives. Last year it issued the master agreements for treasury placement (MATP), which has been completed; in March 2010 it announced the IIFM/ISDA Tahawwut (hedging) master agreement; and now the reference paper on I'Aadat Al-Shira'a (IS) (the Islamic alternative to repo, which explores the possibilities of Shariah-compliant repurchase and collateralization prospects.

The Tahawwut (hedging) master agreement (TMA) announced by the IIFM in cooperation with the International Swaps and Derivatives Association, Inc. (ISDA) will be launched soon and gives the global Islamic financial industry the ability to trade Shariah-compliant hedging transactions such as profit-rate and currency swaps, which are estimated to represent most of today's Islamic hedging transactions. Ijlal Ahmed Alvi, the CEO of IIFM, hailed the TMA as "a breakthrough in Islamic finance and risk management, and marks the introduction of the first globally standardized documentation for privately negotiated Islamic hedging products."

In the conventional sense a repo, according to IIFM's Ijlal Alvi, is a simultaneous purchase and sale of a security at a pre-agreed time and price. The agreement is between two parties, whereby one party sells to the other party a security at market price. In terms of the Shariah, this is acceptable.

However, there is a commitment to buy the same security back at a later date for a pre-agreed price. This presents a major Shariah issue.

In a classic repo, the transfer of title takes place but ownership is maintained. The economic benefit is not transferred which means interest or dividend is paid to original owner.

In a Buy and Sell structure, there is a complete transfer of all rights and benefits.

Bankers stress that repos are important tools in cash and liquidity management; in creating liquidity in the underlying instrument; in financing and leveraging the investment; in credit enhancement and greater volume; in playing a role in other structured products (derivatives, swaps etc); and in oiling the wheel of the bond market.

The objectives of the I'aadat Al-Shira'a (repurchase) project, according to IIFM, include the funding the positions of Sukuk and other instruments; better asset, liquidity and cash management; assisting in sukuk credit and yield pickup and increasing secondary market liquidity in sukuk; a useful tool which can be used by central banks to control money supply and to better fulfill reserve requirements.