Karachi: Deputy Governor, State Bank of Pakistan Yaseen Anwar stressed need to develop robust Shariah compliant risk management infrastructure in Pakistan’s Islamic banking industry that will enable both Islamic banks and their clients to mitigate genuine business risks.
Inaugurating workshop on Hedging in Islamic Finance & Master Hedging Agreement, Thursday organized by International Islamic Financial Market IIFM in collaboration with SBP here, he said while conventional banks have access to variety of sophisticated risk management and hedging instruments, there has been dearth of Shariah compliant hedging products in the country for mitigating risks arising out of genuine business transactions that put Islamic Banking Institutions IBIs at a disadvantageous position viz a viz their conventional counterparts.
Describing pace of growth and development of Islamic banking industry in Pakistan as encouraging, he said at present it constitutes over 7% of banking system. Given healthy growth for past several years, enabling regulatory and Shariah compliance framework, growing HR capacity of IBIs and increasing awareness of masses about Islamic banking, share of the industry is likely to increase manifold in the future.
“Despite these positive developments and trends, we need not be complacent as the industry still faces numerous challenges, including development of a robust Shariah compliant risk management infrastructure. Absence of standardized documentation invariably results in significantly higher transaction costs thus making transaction unviable,” he added.
He said notwithstanding dire need of Shariah compliant risk management and hedging instruments for Islamic banks, it should be explicitly understood that such instruments should cover/hedge genuine risks arising due to real business, economic transactions and should in no way allow transactions for speculative motives. “I presume, same is spirit of Tahawwur (Hedging) Master Agreement (TMA).
He said IIFM has played active role in standardization of documentation for liquidity management and hedging products over past few years, which will greatly facilitate development of Islamic Capital & Money Markets across the globe. TMA developed by IIFM in collaboration with International Swaps & Derivatives Association ISDA has been received well globally and is likely to provide big boost to Shariah compliant derivatives market.
He said TMA, is major initiative to standardize hedging document and thus minimize transaction costs. At institutional level, TMA will hopefully pave way for players to provide Shariah compliant, financially viable products and broaden range of risk management instruments available at their disposal.
Ijlal Ahmed Alvi, CEO IIFM said in recent years Islamic hedging market has grown, yet it is still in development phase. TMA is framework risk mitigating document for hedging transactions and developed for entire Islamic finance industry especially Islamic financial institutions IFIs and Islamic windows. Habib Motani, Partner, Clifford Chance LLP, London gave presentation from London through video link on key features (legal & documentation) of TMA & Peter M Werner, Senior Director, International Swaps & Derivatives Association, Inc. on Islamic Jurisdictions– Need for Law Reform.