M Faiz Azmi started the ball rolling by asking Ahmad Nazir Che Yen to explain the need for risk management products in Islamic finance. Nazir explained that Islamic banks face the same risks as conventional banks, for example in the area of asset liability management. One risk would be liquidity risk, i.e. the ability to have excess cash when you need it.

“Islamic banks may hold high-quality securities — AAA-rated papers, for example — but one piece of bad news could turn this paper into an illiquid investment. Therefore, liquidity management is important to preserve capital, minimize credit risk and manage the Islamic bank’s funding cost,” he said.

Mohd Nasiruddin Mohd Kamaruddin then discussed hedging products that were available. He first highlighted that derivatives are a recent trend in Islamic finance and its aim is to insulate against price fluctuations. Currently, he said, there are profit rate swaps, cross currency swaps and forward rate agreements.

The profit rate and cross currency swaps are based on two parallel commodity Murabahah structures. For example, in the cross currency swap, one party would buy commodity in one currency from a broker and sell it in a different currency. Having two sets of this transaction allowed the parties to swap their currency exposure. Imran Mufti added that profit rate swaps are used in Saudi Arabia for project financing.

He also noted that the Middle East market uses parallel purchase undertaking instead of parallel commodity Murabahah to execute swaps.

Nik Sharizal from PwC inquired whether there is a need to have an ISDA-equivalent body to regulate the Islamic derivative products.

In response, Nasiruddin said Standard Chartered has been involved in developing a standardized contract but pointed out that this takes time. Currently, the bank uses bilateral agreements based on English law.

Imran disclosed that a working group has been put together by the International Islamic Financial Market in Bahrain to work on a Shariah compliant ISDA equivalent master agreement.

Humayon Dar, CEO of BMB Islamic, then sought Nasiruddin’s view on whether the double commodity Murabahah structure would provide daily liquidity as the double promissory note structure.

Nasiruddin said, “Our current product was structured to tackle long-term hedging and forex (foreign exchange) exposure. Thus it does not offer daily liquidity.”

Abdulkader then asked if the market has an Islamic repo, to which Nazir responded that the closest structure that they have to repo is the special investment account based on Mudarabah. “We were looking into repo but had to delay it due to documentation problems,” he explained.

Badlisyah Abdul Ghani, CEO of CIMB Islamic, then made a remark that Islamic derivatives have been in Malaysia for the past 20 years based on bilateral agreements. During the last two years, the practice has been standardized based on the ISDA master agreement and Malaysia has come up with an Islamic Derivatives Master Agreement (IDMA). That ended the session.