| DUBAI, March 20
DUBAI, March 20 Dubai's government-owned
commodities centre is launching a sharia-compliant commodity
trading platform which Islamic banks in the Gulf could use to
manage their short-term fund flows.
The Tradeflow platform developed by the Dubai Multi
Commodities Centre (DMCC) allows trading of warehouse receipts,
which represent ownership of commodities stored at warehouses.
Islamic banks cannot use conventional interbank money
markets because of Islam's ban on interest, so they have
struggled with a shortage of instruments to manage liquidity.
The DMCC hopes its platform can be part of the solution to
this problem, since warehouse receipts are based on actual
trading of physical assets, an important principle in Islamic
"What we have built is a completely different alternative to
what is out there. Assets are really owned, really transferred -
scholars can check these and all contracts are standardised,"
Tradeflow director Paul Boots told Reuters.
"We realised that there was a shortage of sharia-compliant
money market instruments, which means Islamic banks end up with
large concentrations of cash."
The DMCC has operated a conventional trading platform for
commodity receipts for years; the Islamic platform now being
launched tracks the ownership of commodities in a way which
gives assurance that a "true sale" of commodities is occuring.
That assurance is necessary for Islamic banks to enter into
murabaha contracts with each other to place their surplus funds.
"Banks still offload their master murabaha agreement as per
their conditions, but all the sales and purchases are done in a
very standardised way to ensure they are real sales purchases,"
The Islamic trading platform, developed with sharia advisory
firm Dar al Sharia, which is headed by prominent scholar Hussein
Hassan, also involves the DMCC certifying that storage
facilities for the commodities meet Islamic principles.
Unannounced site visits are made every six months, Boots said.
Commodity murabaha is one of the most common financing
structures in Islamic banking; an institution agrees to purchase
merchandise from a counterparty which promises to buy it back
with an agreed mark-up at a later date.
Some religious scholars have criticised murabaha for its
lack of economic substance, arguing there is no effective change
in ownership of the goods. But Islamic banks rely heavily on
murabaha - around the world, 30 to 50 percent of their balance
sheets often comprise murabaha-related transactions, according
to data from the Islamic Banks & Financial Institutions
The United Arab Emirates central bank issues murabaha-based
certificates of deposit, and it began offering a funding
facility to banks based on murabaha in June 2011.
Banks in the UAE held 15.1 billion dirhams ($4.1 billion) of
Islamic certificates of deposit in December 2012, an increase of
16.2 percent from a year earlier, central bank data shows.
Analysts say banks are reluctant to switch away from this
widely used instrument, but an asset-backed instrument such as
the DMCC receipts might eventually find broad appeal in the
Boots said the DMCC was currently working on its first
Islamic transaction in warehouse receipts, but declined to give
a timeframe for when it might go ahead.
"We've been in touch with Islamic banks in general, mainly
the larger ones that would have a greater need for this type of