DUBAI May 10 Islamic repurchase agreements may
struggle to gain wide acceptance as a tool for financial
institutions because the industry lacks clear rules governing
their use, participants at a major industry conference told
Liquidity management products such as Islamic repos were one
of the main themes at the annual meeting of the Bahrain-based
Accounting and Auditing Organisation for Islamic Financial
Institutions (AAOIFI) in Manama this week.
The shortage of such instruments is becoming increasingly
problematic for Islamic finance as the industry grows, bankers
and analysts said. By allowing investors to lend out assets for
short periods, Islamic repos could help to solve the problem by
giving banks a way to balance their short-term liquidity flows
So many in the industry are keen for AAOIFI, one of the
world's top standard-setting bodies in Islamic finance, to set
guidelines for how repos should be structured and used.
"Some banks are flush with deposits and they need to manage
this liquidity," Srinivasan Gopalakrishnan, assistant vice
president at Bahrain-based Al Salam Bank, told Reuters. "A lot
of participants want AAOIFI to be more active, and for it to
Khaled Al Fakih, AAOIFI's secretary general, told Reuters
before the meeting: "We would like to see insightful debate on
repo and hedging that can help us develop standards that can
benefit the industry."
But creating instruments that are widely recognised as
obeying Islamic principles is proving particularly difficult in
the case of repos, and participants at this week's meeting said
there was no conclusive outcome from the discussions.
Five possible methods to create an Islamic repo were
outlined in a speech by Yousef Abdullah Al Shubaily, sharia
scholar at Dubai-based Minhaj Advisory, but there was no
consensus on which should be favoured.
"There was not much depth" in discussions, said Zarizan
Ibrahim, sharia manager at Malaysia's CIMB. "More research
should be done."
Another delegate said: "They discussed the elements and
functions in general...but there were no recommendations."
In conventional repos, an investor borrows an asset for a
predetermined period during which he receives income from it.
The very phrase "Islamic repo" is controversial among some
scholars who fear the instruments might simply replicate
conventional financial products without addressing a real
"Conceptually the benchmark is conventional financial
products, and this fundamentally presents an issue for
scholars," said Paul McViety, legal director at law firm DLA
Religious principles look likely to constrain the use of
Islamic repos. Calculating margin calls on repos may be
problematic since it can be seen as using an implicit interest
rate. Trading the assets behind repos with third parties could
be disallowed by some scholars because of Islam's ban on pure
monetary speculation; this makes Islamic repos less attractive
Another issue is the practice of netting, which allows firms
to effectively cancel positions within their trading books by
setting them off against each other. Netting is not recognised
by regulators in many Gulf countries where Islamic repos might
be conducted, according to a report by Bahrain-based
International Islamic Financial Market.
Zainal Abidin Mohamed, head of business banking at
Malaysia-based AmIslamic Bank, said such issues needed to be
"If we want to make Islamic banking more international, we
need more time to discuss these," he said on the sidelines of
A hedging master agreement was launched by the IIFM and the
International Swaps and Derivatives Association in March 2010,
and could help to provide a basis for Islamic repo deals.
But the agreement has not yet gained full, global acceptance
and in practice banks have used the template as a reference
document, making modifications of their own. This has generated
variations in contracts that have increased uncertainty and may
be slowing the development of the Islamic repo market.
Nevertheless, market demand is pushing institutions to
introduce the instrument. Last August National Bank of Abu Dhabi
and Abu Dhabi Islamic Bank executed what
they described as the Gulf's first sharia-compliant repo
transaction, a one-week maturity deal that was valued at $20
million and was backed by Malaysian and Abu Dhabi
They used a collateralised murabaha model for the repo, a
common cost-plus arrangement in Islamic finance.
Since then, NBAD has done several other Islamic repo deals,
including a $100 million transaction, said Mark Pritchard, vice
president and head of Islamic institutional coverage at NBAD's
financial markets division.
The deals, including weekly and monthly tenors, have been
done with United Arab Emirates and Bahrain counterparties, said
Pritchard, adding that his bank hoped to expand the transactions
to another Gulf country, which he did not name.
He also said NBAD was looking at potential alternatives to
the murabaha model for Islamic repos.
Even if the industry agrees on common standards for repos,
past experience with other Islamic hedging products suggests it
might take two to three years for an active market to develop,
according to Ijlal Ahmed Alvi, chief executive of IIFM.
Some industry participants think the market needs a
clearinghouse which would alleviate concerns such as
counterparty risk and legal enforceability of contracts. Setting
up such a clearinghouse, however, was not discussed in detail at
the AAOIFI meeting, and it is not clear who would take
responsibility for it.
(Editing by Andrew Torchia)