ISDA and IIFM aim for the agreement to be accepted by Shari’ah advisors and to become a standard document used for Shari’ah compliant privately negotiated derivatives in Gulf Cooperative Council member states and beyond. As part of this understanding, ISDA and IIFM have formed a joint working group open to members of both organizations, which will meet every four to six weeks. IIFM’s Shari’ah Supervisory Committee will be charged with evaluating the Shari’ah compliance of the master agreement.
Unlike their conventional counterparts, Islamic financial institutions (IFIs) have at their disposal a limited range of ‘allowed’ investment instruments, particularly hedging instruments, a key use of derivatives. This constraint has hindered the development of an efficient and active Islamic financial market. The limited risk management options available to IFIs makes them less competitive and, most importantly, affects their profitability.
“The potential market for Shari’ah compliant derivatives is a new and exciting area for ISDA and its membership,” said Robert Pickel, Chief Executive Officer and Executive Director of ISDA. “We look forward to addressing the unique set of challenges and opportunities in documenting these transactions and are delighted to be working closely with IIFM to this end.”
“The development of a Shari’ah compliant contract for derivatives will revolutionize the global Islamic financial market,”
said Mr. Ijlal Alvi, Chief Executive Officer of IIFM.
“The use of well structured risk management derivatives products will open up a whole new horizon of investment opportunities to IFIs, enabling them to manage their risk in a more efficient and effective manner. It will also take the Islamic financial market to a higher level of sophistication.”
IIFM intends to seek endorsement from regulatory authorities of different financial jurisdictions, particularly those from which IFIs operate.
“This is a significant undertaking,” said Mr. Pickel. “IIFM’s unparalleled expertise in the region will be vital to attaining recognition and acceptance of the new document.”
“IIFM’s host regulator, the Bahrain Monetary Agency (BMA), has been extremely encouraging of our efforts in this regard and we are confident of BMA’s support as we advance our work in the area of standardization for the global Islamic financial services industry,” said Mr. Alvi. “IIFM is delighted to have the opportunity of working with ISDA as the leading standard-setter in the area of financial derivatives.
The agreement to be developed by the two associations will be subject to copyright of ISDA and IIFM.
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