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Friday February 18, 2011
KUALA LUMPUR: An Islamic finance research body backed by Bank Negara is drafting rules to regulate the use of derivatives to strengthen the industry's risk management framework and repair the perception of poor syariah compliance among banks.
The guidelines could help plug a yawning gap in an industry which has struggled to develop hedging tools that do not resemble betting instruments a major handicap that can expose Islamic banks to excessive swings in currency and interest rate movements.
The International Shariah Research Academy for Islamic Finance's (ISRA) rules would prescribe the boundaries that syariah banks have to observe to ensure that the usage of derivatives complies with Islam's ban on gambling.
“Islamic derivatives is still a controversial instrument even though the objectives where the instrument was introduced are clear and noble to hedge against potential risks,” ISRA research affairs head Asyraf Wajdi Dusuki said in an interview.
“What is the difference between speculative trading and hedging? We have to define clearly what is hedging.”
The US$1 trillion Islamic finance sector prohibits banking structures that are vague or ambiguous to avoid exploitation a rule which some market watchers argue shuts out the use of common hedging instruments such as currency and interest rate swaps and futures contracts.
But some Islamic experts argue that derivatives are allowed as long as they are used to deal with currency and rate fluctuations and not for punting.
ISRA's rules, which have to be approved by the central bank, would ensure that Islamic lenders use derivatives only for hedging by showing proof of an underlying economic transaction, Asyraf said.
The guidelines would also tackle legal and syariah issues arising from the popular practice of using the waad and tawarruq concepts to structure Islamic derivatives, he said.
Waad or promise is frequently used to underpin Islamic derivatives but such a pledge is only binding on one party and there can be difficulties where one wishes to proceed with the agreement while the other refuses.
Bilateral promises are prohibited as they are tantamount to legal contracts, which would fall foul of the syariah rule that an exchange of currencies has to be conducted on a spot basis.
Asyraf said ISRA's rules would consider the use of unrelated bilateral promises that contained different sets of conditions to avoid the issue of a legal contract arising.
The new rules come at a time when regulators and Islamic banks are working to shore up the industry's image which has been dented by a high profile legal dispute on syariah compliance and perceptions of inadequate supervision. Reuters
For Bank Negara statements click here
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