IIFM Introduces Sharia-Compliant Forex Forward Standards

The International Islamic Financial Market (IIFM) today announced the launch of standard templates for sharia-compliant foreign Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term forwards in a move to improve hedging practices in the industry and the need for more cost effective tools to manage foreign currency risks.

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Two Templates

The Bahrain-based IIFM, which started operations in 2002, has outlined two templates to accommodate the main industry practices.

The standards involve the use of either one or two unilateral promises, known as wa'ad, which are committed separately by each counterparty, with the latter providing greater credit security.

Ijlal Ahmed Alvi, Chief Excecutive, IIFM, said: "Based on market requirement and feedback, our assessment is that the use of two unilateral wa'ad structure will increase. Certain other FX products can now be explored under two unilateral wa'ad concept, which IIFM may look into in the future."

There are currently several hedging tools used in Islamic finance. Some are based on a cost-plus-profit arrangement, otherwise known as murabaha, but these tend to be cumbersome as well as costly.

Strict Principles

Islamic finance adheres to religious principles which ban the charging of interest and avoid ambiguity in contracts.

Islamic banks are thus precluded from traditional forwards as they are legally binding from the outset, leaving counterparties exposed to an uncertain outcome.

In an Islamic forward, the exchange rate is fixed at the outset but remains a promise until offer and acceptance is completed at the forward date. At this point, the transaction becomes a contract.

The choice of wa'ad also means that Islamic banks do not need to employ their balance sheets for their hedging needs, compared to previous practices under murabaha.

The IIFM, which developed the standards in combination with the International Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term and Derivatives Association (ISDA), has previously launched templates for cross currency and profit rate swaps and the Islamic equivalents to repurchase agreements.