Seeking to tap into the $1 trillion Islamic finance industry, with an expected growth of 15 percent per annum, Thomson Reuters on Tuesday launched IIBR, a benchmark to provide scientific, market-agreed indications for the average expected return on Shariah-compliant short-term interbank funding.
The expansion, which is expected to include only commercial banks, is also seeing an interest from an Islamic investment bank.
“An investment bank came to us, requested that they want to contribute and asked why they were not involved,” said Siddiqui who did not want to mention the bank’s name, adding “It is a good problem.”
Despite its ambition to be a fully-fledged world-encompassing marker, the recent launch is GCC centric and focused mainly on countries pegged to the dollar for the time being.
“The initial launch is GCC centric and that is from a technical point of view,” he said, citing the difference between Muslim countries outside of the GCC that are using their local currencies, while most of the Gulf Arab states are dollar-pegged making for smoother global dealings.
“We have Islamic banks in Bangladesh, Pakistan, Bosnia, they are using Murabaha rates, but are they using local currencies? We have to work with what is given to us right now,” starting with GCC countries and them being pegged to the dollar, he added
Meanwhile, the London Interbank Offered Rate (LIBOR) since 1986 was used in Islamic contracts as price reference, but has been widely criticized for still using interest-rates.
“The de-linking process from LIBOR started 12 years ago, when Islamic Equity Index was lunched,” said Siddiqui who was behind the launch of the index with Dow Jones in 1999.
“This is a leading indicator of Islamic finance, and so now, if people are interested in Islamic mortgage, they can directly go to IIBR and see the reference rate.”
To rebuff criticism that there will be no difference between LIBOR and IIBR, Siddiquie said that there were already differences in tenures’ ratings despite launching the benchmark live on Tuesday.
“In certain tenures it will be cheaper and others it will be expensive,” he said, adding that is still too early to categorize which tenures will be cheaper or more expensive in comparison to LIBOR.
For the time being, short term tenures marked in IIBR were cheaper than the ones in LIBOR, while its long-term was more expensive.
The benchmark will be overseen by an Islamic Benchmark Committee of over 20 Islamic finance institutions, chaired by Nasser Saidi, chief economist of the Dubai International Financial Center (DIFC), and a Shariah Committee consisting of four world-respected Shariah scholars.
The four Sharia scholars, who span their expertise from across the board, are not paid and that is to invest in the project and to symbolize their independence, the global head said.