Trading, Economic and Savings :: World finance

New standard launched for islamic inter bank transactions

A standard contract template for Islamic inter-bank transactions was launched on Monday as the industry works to diversify the range of liquidity management solutions available. The latest standard is part of efforts being made to harmonise industry practices by the Bahrain-based International Islamic Financial Market (IIFM), a non-profit industry body which develops specifications for Islamic finance contracts. It is hoped the standard will displace commodity murabaha, a common cost-plus-profit arrangement in Islamic finance, with a risk-sharing structure called wakala, that is favoured by industry purists."The main objective of this documentation standard is to reduce over-reliance by the financial institutions on commodity murabaha and to encourage greater use of unrestricted wakala," the IIFM said in a statement. Wakala is an agency agreement where an investor authorises an agent to manage a pool of assets following religious principles such as a ban on interest and monetary speculation. Despite being a well known sharia-compliant structure, the absence of documentation with clear guidance has limited its broader use, although the industry is being urged to diversify its money markets transactions.

"The industry will find this memorandum very useful whereby it explains how the standard is to be used and in addition to that it provides very comprehensive recommendations," said Ijlal Ahmed Alvi, IIFM's chief executive. Islamic money markets have expanded in the last few years along with sharia-compliant banking asets, which reached $1.55 trillion worldwide at the end of 2012 and are projected to exceed $2 trillion by 2015, according to Ernst & Young. Commodity murabaha dwarfs other money market instruments used, but it also faces opposition from some Islamic scholars on the boards which oversee banks' activities. The practice is criticised as not sufficiently based on real economic activity, a key principle in Islamic finance.

Discontent has even prompted Oman's regulator to go so far as to ban commodity murabaha altogether, when the Sultanate released its Islamic banking framework in December of last year. CONVERGENCE The wakala standard could also speed-up the convergence of Islamic finance practices across its various regions, according to Khalid Hamad Abdul-Rahman Hamad, executive director-banking supervision at the Central Bank of Bahrain and IIFM chairman.

"This much-awaited documentation standard is another milestone in the standardisation and harmonisation of the Islamic finance industry."The new documentation would encourage the industry to address accounting and regulatory requirements in their respective jurisdictions, he added. The Islamic finance industry has its main centres in the Middle East and southeast Asia, but the regions have for the most part developed independently of each other. While this is not the first wakala standard in the market - a template was launched by Malaysia's association of Islamic banks in 2009 - the IIFM could benefit from wider geographical backing. The IIFM started operations in 2002, founded by the Jeddah-based Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. Additional members include the State Bank of Pakistan and the Dubai International Financial Centre. Last year IIFM launched a standard contract template for Islamic profit rate swaps, and is currently working on others including cross-currency swaps and foreign exchange forwards.

Olympics london businesses fret about disruption

LONDON, June 27 Almost half of London businesses remain concerned about the impact of the Olympics on their operations only a month before the Games begin, a survey showed on Wednesday. Most of the more than 250 London firms surveyed by the Confederation of British Industry said they were looking forward to the Olympics which London will host from July 27-August 12. However, only 37 percent said they were confident about dealing with transport and logistic issues, against 46 percent who said they were nervous."The 2012 Games will help showcase London around the world and will be good for the economy," said Sara Parker, CBI London Director."But with only a month to go, the scale of the challenge is becoming clear and some businesses are still nervous about their levels of preparedness," she added.

Businesses are being urged to encourage staff to change their working hours and get more people to work from home to help ease the overcrowding on London's transport network during the Games. There are also fears that traffic jams and road closures could disrupt deliveries, while other surveys have pointed to the risk of absenteeism during the Olympics. The government is hoping that hosting the Games will provide a showcase for British business and help to pull the economy out of recession.

There was some good news in the survey. Almost all businesses said the Olympics and Paralympics would help to promote London internationally and more than three-quarters forecast a boost to tourism.