(Adds analysis, background)
* Provides sharia-compliant alternative to LIBOR
* May be used to price range of Islamic instruments
* Rates contributed by 16 institutions
* Tenors range from overnight to 1 year
* Faces obstacles to widespread use
By By Shaheen Pasha
MANAMA, Nov 22 A consortium of Islamic
banks and financial industry associations launched the
industry's first international Islamic interbank rate on
Tuesday, offering a sharia-compliant alternative to traditional
The Islamic Interbank Benchmark Rate (IIBR), based
on rates contributed by 16 Islamic banks and Islamic sections of
conventional banks, is the average expected return on
sharia-compliant, short-term interbank funding.
Its creators hope IIBR will be used as a basis for pricing a
wide range of Islamic financial instruments, including sukuk
(Islamic bonds), corporate financing and common Islamic treasury
agreements. Tenors for IIBR will range from overnight to one
"The establishment of the IIBR marks an important milestone
in the maturation of Islamic money markets by providing an
international reference rate for interbank transactions," said
Nasser Saidi, chairman of the committee which sets the rules for
the new system.
IIBR addresses a source of tension within the Islamic
finance industry, which is estimated to have reached $1 trillion
in assets: Islam forbids the use of interest in any transaction,
but the industry has long used the London Interbank Offered Rate
(LIBOR), a system of interest rates, as a benchmark in the
absence of sharia-compliant alternatives.
For details and background on IIBR, click:
RATE OF RETURN
The new system is based on the rate of return on capital
used by Islamic banks, representing the average profit rate at
which bids are made for sharia-compliant interbank transactions,
such as murabaha and wakala deals, between top Islamic financial
institutions. Murabaha is a cost-plus-profit structure used for
funding, while wakala involves the use of an agency agreement in
which one firm accepts funds from another to invest on its
behalf in a sharia-compliant manner.
Some bankers believe the launch of IIBR shows Islamic
finance, which has existed in modern form for several decades,
is finally maturing to a level at which it can compete broadly
with conventional finance -- at a time when turmoil in global
financial markets has raised questions about risks in the
Because Islamic finance bans pure monetary speculation that
is not based on an underlying asset, its proponents present it
as a less risky, more stable alternative to conventional
But it still faces big obstacles to widespread adoption,
including a lack of tools that commercial banks and central
banks can use to adjust liquidity. Disputes between scholars on
acceptable practices, and a lack of trained staff and investor
familiarity with instruments, also hinder Islamic finance.
Khairul Nizam, deputy secretary general of the Accounting
and Auditing Organisation for Islamic Financial Institutions
(AAOIFI), which sets standards for the industry, said IIBR would
for now remain a guideline that banks could voluntarily choose
"We don't have the regulatory authority to compel banks to
use IIBR but as the contributing banks are among the top Islamic
institutions, we are hopeful that as they use it, it will set
IIBR as a benchmark," Nizam said.
"Rather than this being something forced, we want
non-contributing banks to want to start using it, and we are
hopeful that they will."
Nizam added that the IIBR committee, which includes AAOIFI,
was in discussions with Malaysian banks to have them contribute
rates to the pool, to give IIBR a greater global reach beyond
the Gulf. Malaysia has its own Islamic interbank rate system
based on contributions from local Islamic institutions in the
local currency, the ringgit. IIBR is based on the U.S. dollar.
Adoption of IIBR by a wide range of Islamic institutions may
take some time as banks become comfortable with the new system,
said Sheikh Muddassir Siddiqui, a sharia scholar on the
committee's board and partner at law firm SNR Denton in Dubai.
"For a fixed-price contract, such as murabaha, I think we'll
see people using IIBR immediately," he said. "For floating-rate
agreements, such as in some lease (ijara) contracts, the
adoption may take a little longer as people would need to build
the confidence and the comfort level for fixing the cost of
financing on future dates. It is natural."
A banker attending the launch of IIBR, who asked not to be
named, said: "It has good potential but we have to see how the
enforceability works. This benchmark is always going to be at a
premium to the conventional rate. As a borrower, I would prefer
the lower rate."
IIBR was launched by Thomson Reuters Corp ,
which publishes this news service, in cooperation with the
Islamic Development Bank, AAOIFI, the Association of Islamic
Banking Institutions Malaysia, the Bahrain Association of Banks,
the Hawkamah Institute for Corporate Governance, the Statistical
Economic and Social Research Center for Islamic Countries, and
19 Islamic banks, most of them based in the Gulf.
(Additional reporting by Andrew Hammond; Editing by Andrew