New Update from IslamicFinanceArabia.com
*Islamic interbank rate launched Could be used to price range of Islamic
instruments - 1ST PART*
Giving a boost to the booming Islamic finance, a consortium of banks and
financial institutions launched Tuesday, November 22, the industry’s first
international Islamic interbank rate.
A group of 16 banks resolved a quandary that has dogged the $1 trillion
Islamic financing market for nearly three decades: how to represent rates
on interbank funding when Islamic principles prohibit firms from charging
interest.
The banks—working with industry associations and data provider Thomson
Reuters—created a reference rate called the Islamic Interbank Benchmark
Rate, or IIBR, which was put into use for the first time Tuesday. The banks
say the solution, which complies with Islamic moral codes, known as
Shariah, lies in considering money flowing between banks as investments
that depend on the performance of underlying assets, rather than as
interest-bearing loans.
Since the establishment of the first Islamic commercial bank in 1975, the
Islamic finance industry has been searching for an indigenous benchmark
that can be applicable to transactions compliant with Islamic law (Shariah
compliant).
As an ethical financial system, Islamic finance prohibits interest and
shuns all interest-related transactions and instruments as these are
contradictory to the core principles of Islam. Despite this prohibition, in
the absence of a reliable Islamic interbank benchmark, Islamic banks and
financial institutions have continued to utilise conventional interest
based benchmarks to calculate their cost of funding with no reference to
either their assets’ risk profile or the regional particularities of
Islamic banks.
The Islamic Interbank Benchmark Rate (IIBR) serves to address some of these
concerns by developing a rate that is contributed by and is indigenous to a
global panel of Islamic banks and Islamic Banking windows with fully
segregated funds.
Scholars and bankers involved in the project say it is an industry
milestone akin to the first globally issued Islamic corporate bond in 2001,
or the first Islamic sovereign bond in 2002. They say the rate brings
transparency to the Islamic financing process and could encourage broader
use of Islamic banks.
"The establishment of the IIBR marks an important milestone in the
maturation of Islamic money markets by providing an international reference
rate for interbank transactions," said Nasser Saidi, chairman of the
Islamic Benchmark Committee and chief economist at the Dubai International
Financial Centre, in a statement.
The Islamic Interbank Benchmark Rate ('IIBR') is calculated by Thomson
Reuters based on a time tested methodology agreed upon in consultation with
the Islamic Benchmark Committee and approved by the Shariah Committee.
[image: Islamic Interbank Benchmark Rate methodology]
The IIBR is defined as the profit rate that an individual Contributor Panel
bank would perceive to be reasonable for Shariah compliant funding were it
to do so by asking for and then accepting inter-bank offers in reasonable
market size, just prior to 11.00 am Makkah local time (GMT + 3).
The value dates for settlement are T+0 for Overnight funds and T+2 for all
other tenors.
Islamic banks aren't allowed to earn or pay interest, yet have been using
an international interest-rate benchmark—the London interbank offered rate,
or Libor—since 1986. While Libor isn't compliant with Shariah, religious
leaders permitted its use because there was no alternative benchmark based
on socially ethical investing.
Rather than measuring interest on loans as Libor does, IIBR uses expected
profits from short-term money and a forecasted returns on the assets of the
bank receiving funds. Both are considered investments rather than loans,
and therefore interest-free.
Khairul Nizam, deputy secretary general of the Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI), which sets
standards for the industry, said IIBR would for now remain a guideline that
banks could voluntarily choose to adopt.
"We don't have the regulatory authority to compel banks to use IIBR but as
the contributing banks are among the top Islamic institutions, we are
hopeful that as they
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الأدب وخاصة منها التي تأتي من أعضاء لا يشاركون عادة، والقصد من ذلك تشجيعهم على
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