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This standard agreement is the outcome of the IIFM Market Consultative Meeting to explore the possibility of structuring an Islamic Repo and the resultant IIFM White Paper on Islamic Alternative to Repo.
In order to provide the industry with an alternative to conventional Repo as another liquidity management tool, IIFM published the Master Collateralized Murabahah Agreement on 16th November 2014. The standard agreement provides a mechanism for access to liquidity on a collateralized basis (based on the Shari’ah principle of Ar’Rahn) utilizing Sukuk and other Islamic securities portfolio as collateral. It is an important new tool for Islamic financial institutions as they seek to address the increased global regulatory focus on liquidity and collateral.
Collateralized transactions based on Murabahah provide a level playing field for Islamic financial institutions by giving them option to tap funds from central banks in case of liquidity short-fall. The underlying product structure is Murabahah which is the best option to structure this product, where Rahn principal is applied as Rahn requires use of debt type contract.
The standard agreement is accompanied by an operational guidance memorandum which covers the operational procedures which may be implemented by potential users of this agreement.
Prior to the publication of this standard agreement, several institutions had tested the product based on the IIFM White Paper and found it a viable alternative to conventional Repo. Since the publication of this standard agreement, a number of institutions are either using the standard for liquidity management purpose or keeping it for contingency purposes.
Several central banks such as Bank Negara Malaysia and the Central Bank of UAE have included Collateralized Murabahah as an approved liquidity management tool for liquidity management.
1. Creation of Security Interest: This is the term used to describe the interest granted, by way of security, by the Buyer/Chargor in the Collateral delivered to the Seller/Secured Party as a condition to the effectiveness of a Murabahah Contract.
The underlying product structure is Murabahah which is the best option to structure this product, where Rahn principle is applied as Rahn requires use of debt type contract.
2. Collateral Substitution/Replacement Possibility: In this, the Buyer/Chargor may elect to substitute the posted collateral with other with the same specifications as the first one placed, in certain conditions, such Posted Collateral and the conditions attached to such substitution shall be agreed by the Parties prior to such substitution.
3. Margin Maintenance Mechanism (Mark to Market of the Collateral Pool): In this, the Posted Collateral which has been delivered under each Murabahah Contract is held together to collateralise the Buyer’s obligations under each Collateralized Murabahah Transaction.
4. Collateral Management and Custody Services: This involved: (1) Bi-lateral collateral management services by the secured party which is generally its related party. (2) Tri- Party Custodian (third party)
5. Other Clauses such as: Prepayment, Late payment Amount, Events of Default, Rights of Enforcement, Early Termination and Set-Off were tackled in a clear and comprehensive manner to achiev more transparency in the application.
6. Footnotes & Schedules: Inclusion of Shari ‘ah standards footnotes for clarification, authentication and acceptance of all the related transactions.
Schedules include: Form of valuation notice from valuation agent, form of collateral call notice, form of notice of acceleration, form of substitution notice and consent/acknowledgement of substitution notice.
To stay away from the organized tawarruq which has a lot of Shariah issues.
Use: Widely used in Islamic inter-bank market particularly involving cross border trades as per the IIFM recent survey, as well as the gathered information during personal meetings by the IIFM secretariat with financial institutions, market participants, certain regulators and joint partners globally.
Further features & clarification: To avoidorganized tawarruq most institutions use Structure 1 which is the “Deposit taking entity acts as buying agent of the deposit placing entity as well as principal in the second leg of the transaction.
Note: Available through login. For further details please contact IIFM at info@iifm.net