Need for development of robust Shariah compliant risk management infrastructure

There is need for the development of a robust Shariah compliant risk management infrastructure in Pakistan’s Islamic banking industry.

It will enable both the Islamic banks and their clients to mitigate genuine business risks, said Yaseen Anwar Deputy Governor, State Bank of Pakistan (SBP).Inaugurating a workshop on ‘Hedging in Islamic Finance and Master Hedging Agreement,’ organised by International Islamic Financial Market (IIFM) in collaboration with the SBP.He said while conventional banks have access to a variety of sophisticated risk management and hedging instruments, there has been a dearth of Shariah compliant hedging products in the country for mitigating risks arising out of genuine business transactions that put Islamic Banking Institutions (IBIs) at a disadvantageous position viz a viz their conventional counterparts.

Describing the pace of growth and development of the Islamic banking industry in Pakistan as encouraging, he said at present it constitutes over 7 percent of the country’s banking system. Given the healthy growth for the past several years, the enabling regulatory and Shariah compliance framework, the growing HR capacity of IBIs and increasing awareness of the masses about Islamic banking, the share of the industry is likely to increase manifold in the future, he added.He observed despite these positive developments and trends, we need not be complacent as the industry still faces numerous challenges, including development of a robust Shariah compliant risk management infrastructure.

 ‘Moreover, the absence of standardised documentation invariably results in significantly higher transaction costs thus making the transaction unviable,’ he added.He noted notwithstanding the dire need of Shariah compliant risk management and hedging instruments for Islamic banks, it should be explicitly understood that such instruments should cover/hedge the genuine risks arising due to real business and economic transactions and should in no way allow transactions for speculative motives. ‘I presume, the same is the spirit of the Tahawwut (hedging) Master Agreement (TMA). This workshop, I believe, will enable Islamic banking industry to better understand the objectives, the underlying transactions and legal documentation etc suggested in the TMA,’ he said.

He said it would also enable market to develop and offer Shariah compliant hedging instruments. He said the IIFM has played an active role in the standardisation of documentation for liquidity management and hedging products over the past few years, which would greatly facilitate the development of Islamic Capital and Money Markets across the globe. He said TMA developed by IIFM in collaboration with International Swaps and Derivatives Association (ISDA) has been received well globally and is likely to provide a big boost to the Shariah compliant derivatives market.He said the TMA is a major initiative to standardise the hedging document and thus minimise the transaction costs. Also at the institutional level, the TMA will hopefully pave the way for players to provide Shariah compliant and financially viable products as well as broaden the range of risk management instruments available at their disposal,’ he added.While giving a presentation on TMA, Ijlal Ahmed Alvi Chief Executive Officer IIFM said although in recent years Islamic hedging market has grown, yet it was still in the development phase. TMA is a framework risk mitigating document for hedging transactions and is developed for the entire Islamic finance industry especially for Islamic financial institutions (IFIs) as well as for Islamic windows, he added.

Habib Motani, partner, Clifford Chance LLP, London gave a presentation from London through video link and highlighted the key features (legal and documentation) of TMA. Peter M Werner Senior Director ISDA gave a presentation on ‘Islamic Jurisdictions-the Need for Law Reform.’

dailytimes.com.pk