State Bank of Pakistan (SBP) Deputy Governor Yaseen Anwar has stressed the need for the development of a robust Shariah compliant risk management infrastructure for Pakistan’s Islamic banking industry that will enable both the Islamic banks and their clients to mitigate genuine business risks.
Inaugurating a workshop on Hedging in Islamic Finance and Master Hedging Agreement organized by the International Islamic Financial Market (IIFM) in collaboration with SBP here Thursday, Anwar said that while conventional banks have access to a variety of sophisticated risk management and hedging instruments, there has been a dearth of Shariah compliant hedging products in the country. This was important, he said, in order to mitigate the risks arising out of genuine business transactions that put Islamic Banking Institutions (IBIs) in an unfavourable position compared to their conventional counterparts.
Describing the pace of growth of the Islamic banking industry in Pakistan, he said that at present it constitutes over seven per cent of the country’s banking sector. Enabling a Shariah compliant framework, increasing HR capacity of IBIs and awareness about Islamic banking will help it grow manifold, he added. Anwar observed that despite these positive developments we need not be complacent as the industry still faces numerous challenges, including development of a robust Shariah compliant risk management infrastructure.
“Moreover, the absence of standardised documentation invariably results in significantly higher transaction costs thus making the transaction unviable,” he added. He stressed that such instruments should cover genuine risks arising due to real business and economic transactions and should in no way allow transactions for speculative motives. “I presume the spirit of Tahawwut (Hedging) Master Agreement (TMA) is the same. This workshop, I believe, will enable the Islamic banking industry to better understand the objectives, underlying transactions and legal documentation regarding TMA” he said.
He added that it will also enable our market to develop and offer Shariah compliant hedging instruments. He said the IIFM has played an active role in the standardisation of documentation for liquidity management and hedging products over the past few years, which will greatly facilitate the development of Islamic Capital and Money Markets across the globe. He said the TMA developed by IIFM in collaboration with International Swaps and Derivatives Association (ISDA) has been well received through out the world and is likely to provide a big boost to the Shariah compliant derivatives market.
Anwar said that TMA is a major initiative to standardise hedging documents and thus minimizing transaction costs. “Also at the institutional level, the TMA will hopefully pave the way for banks to provide Shariah compliant and financially viable products as well as broaden the range of risk management instruments available at their disposal”, he added. While giving a presentation on TMA, IIFM CEO Ijlal Ahmed Alvi, said that although in recent years Islamic hedging market has grown, it is still in the developing phase.
He said TMA is a framework for risk mitigating documents for hedging transactions and is developed for the entire Islamic finance industry especially for Islamic financial institutions (IFIs).
