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Islamic derivatives standard to add product contracts

Documentation to be simplified.

November 23, 2010 9:50 by

Bankers hoping to introduce the wider use of derivatives in Islamic finance said on Monday they would develop simpler individual contracts to try and foster the wider use of such instruments.

Islamic finance industry body IIFM and several international banks launched in March the Tahawwut Master Agreement (TMA), a template for an over-the-counter Islamic derivatives contract that aims at allowing quicker and cheaper Islamic risk management and more frequent cross-currency transactions.

The emerging Islamic finance industry has not yet developed all of the products used by conventional banks, and its banks are seen as at a disadvantage on making cross-border investments as they cannot hedge against currency risks.

But the agreement has struggled to gain traction in the Gulf as local Islamic banks are put off by the complex documentation and as they still question the compliance of hedging products with Islamic law that prohibits speculation.

“The way we think the market will develop is having a master (agreement) and then having standardised product schedules and that is what we’re going to work on now, for the very commonly used products like profit rate swaps, like FX,” Simon Eedle, head of Islamic finance at Credit Agricole CIB told Reuters.

“When those are in the market I think we’ll see a much faster take-up of the TMA,” he said.

He said the additional contracts to be developed over the coming months would allow banks to hedge risks based on contracts of a few pages that can refer to the TMA documentation for more fundamental issues like events of defaults.

Naveed Khan, head of Islamic banking at Bahrain-based Arab Banking Corporation , which also backs the TMA, said the agreement allowed Islamic banks to hedge against risks, a legitimate purpose under Islamic law.

“If somebody did want to engage in speculation or leverage, why would they choose to use the TMA if this was available to them in a conventional manner?”, he told a conference in Manama.

(Reporting by Frederik Richter; Editing by )

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