Thursday 9 February 2023 \

 

First Islamic interbank funding rate launched

Islamic law forbids payment of interest.

by Issac John
Source: Khaleej Times Online

DUBAI – A group of Islamic financial institutions has launched the world’s first benchmark for Islamic interbank lending as an alternative to LIBOR, or the London Interbank Offered Rate.

As LIBOR, the current global benchmark is not compatible with Islamic law, which forbids payment of interest, the group comprising several leading Islamic banks, has developed systems of profit sharing that comply with Shariah law.

Thomson Reuters took the landmark initiative for the Shariah-compliant short-term interbank funding rate.

The LIBOR alternative, known as Islamic Interbank Benchmark Rate (IIBR), was announced at the 18th annual World Islamic Banking Conference in Bahrain.

IIBR uses the contributed rates of 16 Islamic banks and the Islamic sections of conventional banks to provide a reliable and much-needed alternative for pricing Islamic instruments to the conventional interest-based benchmarks used for mainstream finance.

IIBR’s debut comes at a crucial time when Islamic finance market is on a fast growth trajectory.

According to Ernst & Young’s inaugural World Islamic Banking Competitiveness report, Islamic banking assets with commercial banks globally would reach $1.1 trillion in 2012, a major jump of 33 per cent from their 2010 level of $826 billion.

The report, presented at the World Islamic Banking Conference, said Islamic banking assets in the Middle East and North Africa region increased to $416 billion in 2010, representing a five year compound annual growth rate of 20 per cent compared to less than nine per cent for conventional banks. “As new geographies open up to Islamic banking, the Mena Islamic banking industry is expected to more than double to $990 billion by 2015,” the report said.

IIBR’s ongoing implementation and integrity will be overseen by an Islamic Benchmark Committee of over 20 Islamic finance institutions, chaired by Dr Nasser Saidi, chief economist of the Dubai International Financial Centre, and a Shariah Committee consisting of four world-respected Shariah scholars.

“The establishment of the IIBR marks an important milestone in the maturation of Islamic money markets by providing an international reference rate for interbank transactions. Conventional money markets have relied on LIBOR, which by definition does not comply with Shariah conventions. Islamic markets will be able to rely on the IIBR and it will become an international reference rate for both conventional and Shariah-compliant transactions,” said Dr Saidi.

“Our aim is to provide an IIBR that is reliable, timely, representative of market conditions, transparent in its construction and accepted as the market reference. Islamic money and financial markets are coming of age and becoming part of the mainstream,” he said.

Rushdi Siddiqui, global head of Islamic finance, Thomson Reuters, said the delinking from conventional performance benchmarks started more than a dozen years ago.

“We have taken a collaborative approach as industry challenges are best solved by industry players working towards a common objective. The simplicity and robustness of the new benchmark’s methodology, governance, and transparency, combined with the endorsement of many respected Islamic financial institutions and scholars, will result in a reliable and realistic benchmark that better measures cost of funding for Islamic financial institutions. Together we are taking an important step forward for Islamic finance authenticity,” said Siddiqui.

Established in co-operation with the Islamic Development Bank, Accounting and Auditing Organisation for Islamic Financial Institutions, the Bahrain Association of Banks, Hawkamah Institute for Corporate Governance and a number of major Islamic banks, the IIBR harnesses Thomson Reuters global benchmark fixings infrastructure which is used to compile over 100 fixings around the world.

 

 

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