The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched the ISDA/IIFM Mubadalatul Arbaah (Profit Rate Swap) product standard to be used for Islamic hedging purposes.
The Mubadalatul Arbaah (MA) standard follows on from the ISDA/IIFM Tahawwut (Hedging) Master Agreement and provides the industry with a framework for Islamic risk mitigation.
Are derivatives acceptable in Islamic finance? Of course the answer is yes, but one must appreciate the difference between Islamic derivatives and their conventional counterparts.
Furthermore, while the use of derivative contracts is acceptable in Islamic finance, there are limits to trading in them. On a philosophical level, almost all Islamic financial products are in fact examples of derivative contracts. For example, a Sukuk (an Islamic equivalent of a bond) may link the returns of an asset (e.g., a property) to an interest rate mechanism such as LIBOR.
Standard Chartered Plc and Bank Islam Malaysia Bhd. plan to offer Shariah-compliant derivatives in Malaysia that will allow investors to hedge against interest rates and commodity prices.
Standard Chartered, the U.K. bank that earns most of its profit from emerging markets, will begin selling contracts in the first quarter that provide protection from fluctuations in the cost of items such as rice and oil, according to an e-mailed reply to questions yesterday. Bank Islam Malaysia, the country’s oldest Islamic lender, will offer swaps that allow two parties to exchange different forms of payments from an underlying asset.
Few took notice outside certain coteries of specialist bankers and lawyers, but the launch of a 42 page master documentation for derivatives that comply with Muslim religious principles could have a far-reaching impact on the Islamic finance industry.The International Islamic Financial Market (IIFM), a Bahrain-based Islamic capital markets body, and the International Swaps and Derivatives Association (ISDA) have for the past four years been working on standardised documentation for derivative instruments that comply with sharia, or Islamic law.
Islamic financial bodies, which adhere to religious proscriptions against interest, have a market potential of at least US$5 trillion ($5.43 trillion), Moody's Investors Service said.
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