Islamic finance body launches cross currency swap standard
Standard provides guidance to ensure transactions are used for legitimate hedging purposes
The Bahrain-based International Islamic Financial Market (IIFM) launched a standard contract template for sharia compliant cross currency swaps on Thursday, as the industry body seeks to enhance use of hedging tools in the sector.
As Islamic finance grows, institutions are increasingly taking larger positions, often in various currencies, prompting the need for widely-accepted mechanisms to manage such risks.
It is the seventh standard issued by the IIFM, a non-profit industry body which develops specifications for Islamic finance contracts.
Applications of the standard are mainly for interbank treasury placements, but it can also be used alongside Islamic bonds (sukuk) as well as trade and corporate finance deals, chief executive Ijlal Ahmed Alvi said.
Islamic cross currency swaps have been used for years, but industry scholars have sought greater clarity on them to ensure they are not used for outright speculation, a key principle in Islamic finance.
There have been several approaches to such sharia compliant hedging tools, with the IIFM standard covering a combination of two types of Islamic contracts in a sign that the industry is favouring harmonisation of complex transactions.