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Collateralised murabaha a viable Islamic repo-scholar

Bahrain-based International Islamic Financial Market last month introduced a repo alternative based on the collateralised murabaha structure.


August 3, 2010 10:53 by

Collateralised murabaha is a better Islamic repo alternative than inah, a respected sharia scholar said, supporting a new structure aimed at broadening the range of liquidity management tools.

The shortage of sharia-compliant liquidity instruments is regarded as a major handicap of Islamic banks, as the religion’s ban on interest rules out most interbank money market tools.

Bahrain-based International Islamic Financial Market, an industry body backed by various central banks, last month introduced a repo alternative based on the collateralised murabaha structure.

The new structure, which mirrors collateralised financing, has been adopted by some Middle Eastern institutions but is not widely used.

Sharia scholar Aznan Hasan, who advises Barclays Capital London and Malaysia’s stock exchange operator Bursa Malaysia, said collateralised murabaha was less contentious than inah-based repo.

Inah is a sale and buyback structure which has been likened to a conventional loan. Many of Malaysia’s Islamic interbank money market instruments are based on the inah concept.

Aznan said collateralised murabaha more closely mirrors the repo structure than Malaysia’s Islamic repo, known as the Sale and Buyback Agreement.

“The features of the Sale and Buyback Agreement do not totally replicate the classic repo,” Aznan told Reuters on the sidelines of a sharia scholars conference. “This collateralised murabaha can replicate the classic repo.”

Under collateralised murabaha, a central bank can invest $100 million for a month with a bank through a murabaha transaction. In return, the central bank gets $110 million worth of sukuk as collateral, allowing for price fluctuations.

If the fluctuations are within the prescribed limit, on the maturity date the central bank receives $100 million and the profit and returns the sukuk to the bank.

If the value of the collateral falls below the limit, the bank can provide further sukuk or other collateral. If the value exceeds the limit, the central bank will return part of the sukuk to bring it down to 110 percent of the murabaha amount.

(Reporting by Liau Y-Sing)


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