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.
According to Reuters, 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.
In a statement released by the IIFM, 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.
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.
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