Manama, Bahrain, 18 May 2016 -The International Islamic Financial Market (IIFM) organised a Workshop on Islamic Finance focusing on “IIFM Standard Documents and Product Templates” on 10th May 2016 in Kuala Lumpur, Malaysia. The workshop was hosted by Labuan FSA in conjunction with the Global Islamic Finance Forum 5.0, organised by the Association of Islamic Banking Institutions Malaysia (AIBIM) from 10 to 12 May 2016 at Sasana Kijang, Bank Negara Malaysia.
The specialized half-day technical workshop was attended by more than 120 delegates from treasury, risk, legal, regulatory and related professionals of financial institutions active in Islamic finance from Malaysia, Far East region and other jurisdictions. The participants were given detailed technical briefing on IIFM standards on Islamic hedging and liquidity management. The workshop also provided update on Sukuk market developments based on recently published 5th edition of the IIFM Sukuk Report series.
In his Welcome Address, H.E. Datuk Ahmed Hizzad, Director-General of Labuan FSA said “the international Islamic institutions such as the IIFM, the Islamic Financial Services Board, the Islamic Development Bank, the Accounting and Auditing Organization for Islamic Financial Institutions and the International Islamic Liquidity Management Corporation have played a pivotal role in strengthening the infrastructure of the Islamic financial system, contributing towards building a solid foundation for the progressive growth of Islamic finance.
The Chief Executive of IIFM, Mr. Ijlal Ahmed Alvi, in his Opening Remarks highlighted on the expansion of Islamic finance and increasing sophistication in Islamic financial products and arrangements. He stressed on the need of developing unified financial contracts and products standards to which IIFM has responded with a series of standards on Islamic Capital & Money Market. With its Board directive, IIFM has also on-going work in developing standards relating to Trade Finance & Corporate Finance. He pointed out that implementation of these standards will provide transparency, cost efficiency, best practices and most importantly Shari’ah harmonization. Mr. Alvi urged the participants to join hands in IIFM standardization efforts by taking active role in the project specific working groups and taking up membership in IIFM.
The first session of the workshop was on “Islamic Hedging Framework” where Mr. Ijlal Ahmed Alvi, CEO of IIFM (Bahrain) explained the Shari’ah aspects, guidelines and reasoning of Islamic hedging. He also explained why commodity Murabahah (as defined by AAOIFI) and Wa’ad (promise) are two main tools in structuring key Islamic hedging products for risk mitigation and their inclusion in the ISDA/IIFM Tahawwut Master Agreement. He went on to provide in-depth explanation on key terms of the master agreement, Islamic hedging product templates and soon to be developed Islamic Credit Support Deed. Mr. Alvi also provided detailed information on IIFM’s comprehensive standards development process which leads to publication of global standards.
Mr. Habib Motani, Partner at Clifford Chance LLP (London) gave a detailed presentation on the legal aspects of the master agreement including detailed briefing on key clauses such as early termination, transactions/designated future transaction terms agreement, flawed asset or conditionality provision, events of default and termination events, use of Musawama etc.
Mr. Khurram Hilal, MD & Head of Group Islamic Products of Standard Chartered Bank (Dubai) explained the key Islamic hedging tools and their structuring options to mitigate currency and rate of return mismatch risk in his presentation. He also explained why Murabahah and binding unilateral Wa’ad is used in Islamic Profit Rate Swap (IPRS) and Islamic Cross Currency Swap (ICRCS) documentation while Islamic FX Forward product structures involve only binding single Wa’ad or two binding unilateral Wa’ad as cash-flow risk associated with FX Forward is much less than IPRS or ICRCS products.
Dr. Peter Werner, Senior Director of International Swaps & Derivatives Association (ISDA) then provided the overview of governing law and netting provisioning and importance of recognition of financial contracts particularly in cross-border transactions. He stressed on the necessity of standardized documentation and product templates for Islamic hedging segment. Dr. Werner also provided overview of close-out netting law in around 60 countries plus recent entry of Bahrain and DIFC as new jurisdictions. He also mentioned the pending bill in several countries including Pakistan. Dr. Werner also covered the new regulations involving need for collateral and margin maintenance such as Basel Committee margin requirements, EU Infrastructure Market requirements and Dodd-Frank Act (US law reform) and their potential impact on certain Islamic hedging transactions.
The second session was on “Emerging Islamic Liquidity Management Alternatives” where Mr. Ismail Dadabhoy, Advisor of IIFM (Dubai) started the session by providing details on collateralized Murabahah liquidity management product which has now become necessary due to new regulations impacting the banks capital as well as from credit risk perspective. He also provided reasoning on why commodity Murabahah is used in IIFM standard considering Shari’ah requirement of Rahn (collateral) as per AAOIFI Shari’ah standard. Mr. Motani then explained the mechanics of IIFM Master Collateralized Murabahah Master Agreement (MCMA) from legal perspective such as creation of security interest, collateral to be placed in segregated account, substitution with consent etc., Mr. Karar Zubair, Head of Treasury Division at the Islamic Corporation for the Development of Private Sector (Jeddah) provided detailed comments on the growing use of collateralized liquidity management tool in the Islamic inter-bank market and implementation of MCMA standard in the Islamic finance industry. Mr. Idham Sabki Baharum, Head of Islamic Global Market at Maybank Islamic Berhad (Kuala Lumpur) provided comments on use of collateralized arrangement in Malaysian market and mentioned that all the collateralized transactions take place with the central bank. The panellist also provided insight on the adoption of the MCMA standard.
The other topic of the second session was “Islamic inter-bank market and the benefit of IIFM Unrestricted Wakalah standard”. Mr. Dadabhoy provided detailed overview of the working of IIFM Unrestricted Master Investment Wakalah Agreement and its Guidance Memorandum. His presentation also covered accounting assessment for this standard documentation and its on-balance sheet treatment. He also mentioned the increased use of IIFM standard by the market players including use by Central Bank of Bahrain in developing an investment product for banks. The panellists provided their views and experience of market adoption of this IIFM standard agreement.
The last session was on “Developments in Sukuk Market”. Mr. Mohamad Safri Shahul Hamid, Senior MD & Deputy CEO of CIMB Islamic Bank Berhad (Kuala Lumpur) started the session by giving his bank’s experience in the development of Sukuk market. He also mentioned that the Sukuk market is maintaining its growth trajectory and so far 2016 has witnessed reasonable Sukuk issuances. Mr. Alvi then gave a detailed presentation on the global Sukuk market developments during last fifteen years period. His presentation also covered the mostly used Sukuk structures in the international and domestic markets, Sukuk issuance by sovereign, quasi-sovereign and corporate sectors as well as recent trends. Mr. Zainal Izlan Zainal Abidin, Executive Director at Securities Commission Malaysia presented on Sukuk market regulations by the Securities Commission in Malaysia, promotion of issuance of SRI Sukuk, and removal of mandatory credit rating requirement for Sukuk issuance from the year 2017.
The IIFM workshop was appreciated by the attendees and the participants benefited from the technical information imparted by the speakers.
On the sidelines of the workshop, Labuan FSA hosted the IIFM 34th Board of Directors meeting where the IIFM Board of Directors reviewed the implementation of published standards and acknowledged the growing acceptance of IIFM standards by the industry. The Board thanked the Islamic Development Bank and The Waqf Fund (Bahrain) for providing technical assistance which has enabled IIFM to forge ahead with several new standards including soon to be published Islamic FX Forward Standards based on Single Wa’ad and Two Unilateral Wa’ad structures, these being much awaited by the industry due to growing need of currency risk mitigation as Islamic finance expands to new frontiers. Strategic planning of IIFM was discussed and direction provided by the Board for the management to take it forward.