The International Islamic Financial Market, founded by the central banks of Bahrain, Indonesia and Malaysia, plans to create Shariah-compliant repurchase agreements to help Islamic banks manage funds and boost trading.
The IIFM, a Bahrain-based standards-setting body for Islamic markets, wants to introduce repos that don’t violate the religion’s ban on interest. It has proposed allowing third parties to act as intermediaries between buyers and sellers of sukuk used as collateral for short-term funds.
Regulators from Bahrain to Malaysia are trying to expand products available to Islamic banks and borrowers. The repurchase agreements recommended by the IIFM would use a profit rate, unlike non-Shariah repos, where traders post securities as collateral for cash and agree to buy them back at a specified price and date, earning or paying the difference as interest.
If “banks don’t have an option like an alternative repo tool, then their balance sheets remain tied up,” IIFM Chief Executivei Officer Ijlal Ahmed Alvi said in an Aug. 15 interview from Manama, Bahrain. “A repo tool would definitely help.”
Demand for services complying with Shariah law is increasing about 15 percent annually, according to the Kuala Lumpur-based Islamic Financial Services Board, another standards body for the industry, which oversees about $1 trillion of assets. Holdings may almost triple to $2.8 trillion by 2015, the IFSB estimates.
Islamic bond sales have fallen this year, with returns lagging behind debt in emerging markets.
Global sales of sukuk dropped 28 percent to $7.85 billion, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008.
Banks “need tools to help free up some liquidity in order to keep the markets going,” Moinuddin Malim, chief executive officer of Mashreq Al Islami, the Islamic banking division at Mashreq Bank, said in an interview in Dubai yesterday.
The difference between average yields on Islamic bonds and the London interbank offered rate narrowed eight basis points, or 0.08 percentage point, yesterday to 391. The spread has shrunk 76 basis points so far this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Shariah-compliant debt returned 9.6 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Index, while bonds in developing markets gained 12 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 rose three basis points today to 2.79 percent, according to prices from Royal Bank of Scotland Group Plc. The rate reached 2.76 percent yesterday, the lowest level since the securities were sold in May.
Using sukuk as collateral in Islamic repurchase agreements and the three-party structure need to be developed as a global product, said the IIFM’s Alvi.
IIFM is “willing to take the project further,” he said. “However, industry and certain key players need to come forward” to standardize the product, he added.
Along with central banks in Bahrain, Indonesia and Malaysia, the IIFM also was established by Brunei’s Ministry of Finance and the Jeddah, Saudi Arabia-based Islamic Development Bank, according to its website.