LONDON, 30 April 2007 — The Bahrain-based International Islamic Financial Market (IIFM), which was effectively relaunched in August 2006 after almost three years of uncertainty, has embarked on a “focused program” to develop a number of benchmarks and specific products which could be standardized. These would be primarily for the Islamic capital markets, although the organization is also working on a project to standardize the structure and documentation for the commodity Murabaha, which is widely used in the Islamic banking market especially as a short-term liquidity management mechanism.
“Previously, the emphasis was more on Shariah endorsement,” Ijlal Alvi, chief executive officer of IIFM who assumed the post in 2005, said. “But the market has changed rapidly over the last few years. Our main objectives are to develop the various benchmarks and later to develop a selected number of specific products that could be standardized. This however will be a gradual process. We are also completing a feasibility study on an Islamic management system covering clearing and settlement and a trading platform. This should be completed by first quarter 2007.”
Alvi revealed that the IIFM is also looking at developing an Islamic unit trust template in the future. Benchmarks are very important for the Islamic finance sector because they will eventually bring the cost of transactions down, especially for new- and medium-seized banks. “Some people do not like market uniformity and standardization because they say that this will kill innovation. We do not plan to standardize everything, but only certain specific products. As the market matures, you can always expand this,” Alvi said.
To help facilitate these core objectives, the IIFM has signed two cooperation agreements with international bodies — one with the International Swaps and Derivatives Association (ISDA) and the other with the International Capital Market Association (ICMA). The latter one was signed in London at end-January 2007 “to facilitate joint work in the development of international Islamic financial markets.”
Under the terms of the MoU, ICMA and IIFM will develop best practices and common high standards, aimed at underpinning the efficiency and soundness of Islamic financial market activity. The two institutions will establish a joint working group to develop standardized contracts, standardized language, standard practices for secondary market transactions and standardized practices in trading of Sukuk and other Islamic financial instruments. The next step will be for IIFM to consult market players in prioritizing projects as the intention is primarily to focus on market needs. To facilitate this, the IIFM has set up an Islamic Capital Markets Working Group that includes prominent market players.
The London-based ICMA, a self-regulatory organization and trade association representing constituents and practitioners in the international capital market worldwide, and IIFM will focus their work on the Sukuk (Islamic trust certificates) market, which, according to the IIFM, has grown to over $40 billion in just a few years and is increasingly attracting non-Islamic financial institutions and corporates. The two organizations will collaborate to develop standardized contracts and documentation as well as market practices for Sukuk issuance and securitization.
According to Alvi, the Islamic finance industry has entered a new phase of dynamism, particularly in the area of product development. “Sukuk were the first Islamic products to be launched in 2000,” he said. “Since then, sovereign and corporate Sukuk in excess of $47 billion have been issued, and Sukuk issuance is expected to surpass the $150 billion mark by 2010.
IIFM is focusing on two main projects. The first one is developing a master agreement for Shariah-compliant derivatives products, hence the agreement with ISDA. “The project is in its discussion phase, but our end objective is to standardize clauses for such agreements which can be used globally. The other project is developing a master agreement for the commodity Murabaha contract. This would be more for use in an Islamic interbank system for overnight liquidity management purposes. This product has been around for many years, but there is no universally accepted master agreement for it.
Alvi stressed the master agreements like all the other ones, will be on the basis of voluntary adoption, although he conceded that voluntary adoption can be a problem for Muslim countries. The commodity Murabaha master agreement should be in place between June and September 2007. The IIFM is currently working with a top international law firm in drafting the legal documentation.
The IIFM is a market association and is not a profit center. The fact that the IIFM started and then effectively stopped activities has not helped. “It was difficult to get market confidence back,” Alvi said. “But, fortunately, we have passed that hurdle. Our board is conscious of the fact that the IIFM needs to be adequately resourced to carry out its mandate effectively. The acceptability of the IIFM, nevertheless, has very much improved in the sector. Our approach is very focused now, and we promote our activities through a series of regular workshops and conferences.”
