The situation we are facing today calls upon us to further progress and develop the Islamic financial markets globally, to be equipped with deeper Islamic money market instruments and an Islamic benchmark yield curve.
Jakarta, Indonesia: The International Islamic Financial Market (IIFM) and the International Islamic Liquidity Management Corporation (IILM) hosted a joint awareness seminar with the support of Bank Indonesia at its flagship annual event, the 8th Indonesia Shari’ah Economic Festival (ISEF) on 26 October 2021.
The three hours virtual seminar titled “Global Benchmark Rate Reforms – Challenges & Solutions for Islamic Finance Industry” attracted a global audience of around 200 virtual participants including Islamic finance practitioners, policy makers, experts and academia.
An international line-up of experts on the subject, briefed the audience on this regulatory driven reforms taking place in the conventional markets and the extremely important preparatory work now being concluded by the various working groups in Europe, North America, Switzerland, Japan and some other countries to complete the implementation of alternative benchmark rates or Risk-Free Rates (RFRs) before the Inter-Bank Offered Rates (IBORs) are discontinued by end of 2021.
This major international development also has consequences for different segments of the Islamic finance industry and IIFM undertook the core work in consultation with Islamic finance stakeholders to highlight and address challenges posed to Islamic financial product structures, transactions, documentation as well as related credit and legal matters.
After the publication of a white paper on the subject by IIFM earlier this year, IIFM started building consensus around the development of viable and standardized Shari’ah-compliant solutions and amendments particularly in documentation for Financing, Hedging and Sukuk segments to deal with this transformation.
Earlier this month, IIFM Shari’ah Board approved the ‘IIFM Standard Shari’ah-Compliant Structuring Solutions for RFR Implementation for Murabahah and Ijarah Transactions’ and currently work is underway on hedging related ‘IIFM Standard IBOR Fallback Documentation’ to be published well before the regulatory deadline.
In his welcoming speech, Mr. Nik Mohamed Din, Director General of Labuan Financial Services Authority and Vice Chairman of IIFM remarked, “With the anticipation that IBOR will no longer be published by end of 2021, financial market players should plan the transition of all IBOR-based exposures including all existing contracts to risk-free interest rates, in the next couple of months. The implications for Islamic finance transactions are more challenging as they need to ensure compliance with Shari’ah. IIFM has recently published unified RFR transition solutions for Islamic finance industry which undoubtedly provides tremendous benefit to the industry in smooth transition away from IBOR. I would like to applaud the IIFM and the entire core working group for their exceptional efforts and significant contribution to the industry.”
Dr. Umar Oseni, Chief Executive Officer of the IILM emphasised in his welcoming remarks, “The discontinuation of LIBOR and its identified replacements may raise certain issues and challenges for Islamic financial transactions, as we would expect the slowing down in the LIBOR use from market participants well ahead of this coming year-end. The complex transition will be one to watch globally, as the question of what a post-LIBOR world will look like has been a topic of much discussion among financial institutions, regulators and in global financial markets.
While the imminent transition away from LIBOR will certainly pose a unique set of challenges to the Islamic financial industry as a whole, this could be a great opportunity for all of us to work together to find a workable Shari’ah solution and innovate further and deeper on the back of this global benchmark transition. The situation we are facing today calls upon us to further progress and develop the Islamic financial markets globally, to be equipped with deeper Islamic money market instruments and an Islamic benchmark yield curve.”
In her Keynote Address to officiate the seminar, Her Excellency Ms. Destry Damayanti, Senior Deputy Governor of Bank Indonesia said, “Practical Shari’ah-compliant solutions for new benchmark is such a masterpiece from IIFM in collaboration with IIFM members, Shari’ah scholars and key players of Islamic finance industry. For that reason, I would like to appreciate and congratulate IIFM along with working group project streams for accomplishing this important milestone.”
The seminar was divided into focused sessions covering the topics such as background and differences between IBORs & RFRs, methodologies for tenor rates, RFRs regulations & administrators, global transition implementation timelines, update on IIFM RFR implementation solutions for Islamic financing segment, RFR implementation documentation for Islamic hedging segment and a special session by IILM on potential for an Islamic benchmark rate based on IILM Sukuk experience.
Mr. Khurram Hilal, Chief Executive Officer and Head of Group Islamic Products, Standard Chartered Saadiq and IIFM Board Member spoke on the need for global benchmark rate reforms, differences between IBOR & RFR which impacts product structuring as well as the need for fallback documentation. He also highlighted the challenges for Islamic finance and the importance of the timely publication of IIFM’s RFR implementation related solutions for Islamic financing. He emphasized that IIFM was able to complete this urgent task efficiently and comprehensively within the shortest possible timeframe in consultation with around 50 major institutions globally.
Mr. Mustafa Adil, Head of Islamic Finance, Data & Analytics at the London Stock Exchange Group spoke on RFR Regulations and Administrators, Global Transition Implementation Timelines and development state of SOFR and SONIA RFR tenor rates and its methodologies.
Mr. Ijlal Ahmed Alvi, Chief Executive Officer of IIFM explained the key aspects of IIFM White Paper on IBOR Transition which led to the publication of RFR implementation related standard solutions for Islamic financing transactions. He explained the salient features of the standard solutions for the understanding of the audience and also provided clarity from Shari’ah perspective on use of Overnight RFR and Tenor RFR as benchmark rates.
Mr. Habib Motani, Consultant at London based Clifford Chance LLP spoke on the importance of hedging related RFR fallback documentation and also explained the IIFM-ISDA RFR implementation fallback documentation currently being developed for the Islamic hedging segment.
In the final session, Mr. Hichem Bouqniss, Executive Director of Business Operations at the IILM presented on the IILM Sukuk issuance process, size & number of issuances and geographical distribution of investors in IILM Sukuk. He also made a case for possible development of an Islamic benchmark rate based on the yield curve of IILM Sukuk issuances.
Press Release by the International Islamic Financial Market (IIFM)
About the IILM
The International Islamic Liquidity Management Corporation (IILM) is an international organisation established on 25 October 2010 by central banks, monetary authorities and multilateral organisations to develop and issue short-term Shari’ah-compliant financial instruments to facilitate effective cross-border liquidity management for institutions that offer Islamic financial services (IIFS).
The current members of the IILM Governing Board are the central banks and monetary agencies of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey, the United Arab Emirates, as well as the multilateral Islamic Corporation for the Development of the Private Sector.
Membership of the IILM is open to central banks, monetary authorities, financial regulatory authorities or government ministries or agencies that have regulatory oversight of finance or trade and commerce, and multilateral organisations.
The IILM is hosted by Malaysia and headquartered in Kuala Lumpur.
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