A template for an over-the-counter Islamic derivative contract was launched on Monday, offering a channel for the emerging industry to better hedge itself against risks.
The contract, in the making for three years, is expected to pave the way for quicker and cheaper Islamic risk management and more frequent cross-currency transactions by offering a template that is accepted by Islamic scholars.
The young Islamic finance industry has not yet developed all of the products used by conventional banks, and its banks are seen as at a disadvantage on making cross-border investments as they can not hedge against currency risks.
It is one of its principles of sharia, or Islamic law, that every transaction needs to be underpinned by tangible assets, which has made it difficult for the industry to develope hedging instruments.
"A few years ago, derivatives were not allowed, and not even allowed to be talked about because it was felt that this was not sharia-compliant," said Khalid Hamad, executive director at the Central Bank of Bahrain (CBB) during a news conference in Manama.
Bahrain is a regional banking centre in particular for Islamic banks catering to the Gulf Arab region.
The contract was developed by the IIFM, an Islamic finance industry body, and the International Swaps and Derivatives Association (ISDA) and is also backed by banks such as Bahrain's Arab Banking Corporation ABCB.BH, Credit Agricole CIB (CAGR.PA) and Standard Chartered (STAN.L).
It will create a standard legal framework for derivatives in the Islamic market, while currently contracts are arranged on an ad hoc basis, which can take between six to nine months. Ijlal Alvi, chief executive of the IIFM, said the standard was expected to be mostly used for profit rate and currency swaps.
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