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IIBR: The Trilogy in De-Linking from Conventional Finance RUSHDI SIDDIQUI GLOBAL HEAD ISLAMIC FINANCE & OIC COUNTRIES October 2, 2012

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Page 1: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

IIBR: The Trilogy in De-Linking from Conventional Finance RUSHDI SIDDIQUI GLOBAL HEAD ISLAMIC FINANCE & OIC COUNTRIES October 2, 2012

Page 2: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Market Efficiency & Economic Information

• Market Efficiency & Market Information are inextricably related

• Examples: price dispersion in China after availability of telephones; car prices on internet

• Efficient markets –financial markets especially- dependent on availability of reliable, consistent, verifiable, information about current and expected future ‘states of the world’

• ‘Public Good’ aspect of information

Source: Hawkahma

Page 3: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Market Efficiency & Economic Information

• Better Information Better Resource Allocation & Efficiency

• Disclosure of financial information directs capital to its most productive uses

• Transparency: flow of timely & reliable economic, social, political information about policies and outcomes

• Transparency: Access, Relevance, Quality & reliability

Source: Hawkahma

Page 4: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Financial Market Indicators

• Asset Prices & their indicies are forward looking, discount expected future actions, policies and events

• Tend to be leading indicators of economic activity

• More volatile than real economic indicators

Source: Hawkahma

Page 5: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Growth of Islamic Finance Stages (Abilities)

Viability

Credibility

Durability

Sustainability

Scalability

40 Years $1T $214B Sukuk $100+B iLoans $37-52B iFunds G20 over OIC Presence

Crisis (l &ll) GFH/TID Sukuk Default NPL/Provisioning UK Sov Sukuk?

Windows/Subs Acct/Law Non-OIC IF Hubs

Alternative Catch up to Halal? Faith & Finance Merger

A.I.R. Abilities?

IIBR?

Page 6: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Decoupling Why Important? Authenticity

• Decoupling or Delinking – Conventional finance

– Law of Necessity

– Indigenous development

• Dow Jones Islamic Market Index (1999)

• DJ-CitiGroup Sukuk index (2006)

• DJ Islamic Sustainability Index (2006)

• SAMI Halal Food Index (2011)

• Islamic Interbank Benchmark Rate (IIBR 2011)

Page 7: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

DE-COUPLING FROM LIBOR

BHIBOR

KIBOR

USD LIBOR

Daily USD LIBOR QSAIBOR1Y=, QBHIBOR1Y=, QAEIBOR1Y=, QUSDLIBOR1Y=, QKIBOR1Y=

Price

0.86

0.88

0.9

0.92

0.94

0.96

0.98

1

1.02

1.04

Price

0.8

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A 2009 2010 2011 2012

AEIBOR

SAIBOR

7

Presenter
Presentation Notes
All rates show no correlation from 2009-2011 showing that conventional rates between the US and UAE have not always been complimentary to one another. There seems to be a slight correlation between AEIBOR and BHIBOR towards the 1st quarter of 2012 All rates seem to be going at a steady streamlined rate, with the USD Libor slightly higher during the 1st quarter of 2009 and 2nd quarter of 2010 �
Page 8: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

De-linking begins Oman Crude v Brent/US Crude

• The DME is pushing the Oman contract as a benchmark for markets east of Egypt's Suez canal, arguing that much of the world's crude comes from the region and should be priced in the Middle East. Its target is for the Oman contract to eventually challenge established global benchmarks, Brent <LCOc1> and U.S. crude futures <CLc1>.

• "We strongly believe the Omani crude contract is an outstanding proxy for the Middle Eastern crude. It make lot of sense. It has good correlations," Gary Morsches, managing director, energy for CME Group said in a conference call to reporters.

IIBR v LIBOR • Is IIBR a proxy for ME cost of

Islamic funds?

8

Page 9: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,
Page 10: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Islamic Interbank Benchmark Rate What’s the difference?

• IIBR measures expected profit while conventional benchmarks measures interest rates

• The IIBR question for contributors explicitly refers to the cost of raising Shariah compliant funding

• The IIBR contributors benchmark based on return generated by Islamic assets, hence a reference to an Islamic asset risk profile

• Although invariably some connection/correlation to global markets, the IIBR is linked to the economies of the Islamic world and not to the events and risks of Europe and the US

Page 11: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

A WORLD FIRST

A PARADIGM

SHIFT

FROM THE MARKET

FOR THE MARKET

INVOLVES THE LARGEST ISLAMIC

BANKS

Participating Institutions

Page 12: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Pulse of the Islamic Capital Markets

• Interbank profit rate fixing by 16 contributor banks

• Calculated and distributed by Thomson Reuters

• Governed by the Islamic Benchmark Committee

• Certified by the Shariah committee comprised of AAOIFI scholars

• Calculated daily Sunday-Thursday

What Why

• Certainty, Reliability & Transparency

• To Agree settlement and marked-to-market procedures

• Increase trade through transparent and trusted pricing

• De-link from conventional benchmarks

• Establish local currency benchmarks

• Be rate linked to Islamic bank’s real financing and investment activities

The profit rate that an individual Contributor Panel bank would perceive to be reasonable for Shariah compliant funding were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 am Makkah local time (GMT + 3).

3

Presenter
Presentation Notes
What Fixing exercise of profit rate in a Shariah Compliant interbank transaction, by 16 contributor banks Calculated and distributed by Thomson Reuters, with 25 years of fixing experience Governed by the Islamic Benchmark Committee Adherence and compliance of the fixing exercise to Shariah principles will be certified by the Shariah committee comprised of AAOIFI scholars Calculated daily Sunday-Thursday GCC working days and distributed at 11.am Makkah time Why Establish certainty and enhance reliability in master agreements Agree settlement and marked-to-market procedures Facilitate increased trade through transparent and trusted pricing First step towards de-linking from conventional interest based benchmarks in Islamic finance First step towards establishing local currency benchmarks and transparency Move towards a rate linked to Islamic bank’s real financing and investment activities
Page 13: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

The myriad uses of the Islamic Benchmark

• Pricing of common overnight to short term investment and financing instruments such as Murabaha, Wakala and Mudaraba

• Pricing of longer term investment and financing of yielding assets (Ijarah assets)

• Pricing of sukuk and other Shariah compliant fixed income instruments

• Official incorporation possible for pricing onto confirmations/annexes related to the IIFM-ISDA Tahawwut Master Agreement (TMA).

Indigenous pricing is eventually achieved as Islamic banks increase

•Interbank transaction

•Benchmark securities issuances to the Islamic rate

eventually less reliant on the conventional banking system and its pricing

Banks provide estimate

contributions

Rates incorporated in TR Dealing TR Dealing

captures dealt rates

EVOLUTIONARY OBJECTIVE – INDIGENOUS ISLAMIC PRICING

4

Page 14: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Overall Structure and Governance

Audit Committee

Thomson Reuters

Terminals

Rates Data

By 10.45am Makkah time

Islamic Benchmark Committee Panel Association (Thomson Reuters, Islamic Development Bank, AAOIFI,AIBIM, SESRIC,

Hawkamah Institute for Corporate Governance, Bahrain Association of Banks, and representatives of Contributing Banks)

Fixing

Top & Bottom Quartile Excluded

Arithmetic Mean (Average) Taken

IIBR

By 11.00 am Makkah time

Shariah Committee Sh Taqi Usmani (Chairman), Sh. Yusuf Talal Delorenzo; Dr. Abdulrahim Sultan Al Olama; Dr. Mohammad Daud Bakar; Muddassir Siddiqui, Prof Abbas Mirakhor, Sh Akram Laldin

Selected Contributing

Banks

6

Page 15: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

TENORS: ON, 1 W, 1 M, 2M, 3M, 6M, 9M, 1Y

PUBLICATION FREQUENCY Every business day (Sun – Thurs) except

•New Year’s Day

•Eid Al Adha (1st Shawwal)*

•Eid Al Fitr (10th Dhul Hijjah)* *As determined by the authorities in Saudi Arabia

Timing of Fix publication

Rates are contributed based

on a pre-set question asked to contributor banks

Rates are snapped by Thomson

Reuters

9.00 AM – 10.44 AM 10.45 AM 10.45-10.59 AM 11.00 AM

OFFICIAL REFERENCE TIME: MAKKAH (GMT +3)

Automated and Manual Audit and

Review Procedures (Errors / Tolerance /

Std. Dev / Call)

Publication on Thomson Reuters

Terminals

7

Presenter
Presentation Notes
IIBR FIXING QUESTION “What is the expected profit rate that you would distribute for an interbank Shariah compliant funding transaction, were you to do so by asking for and then accepting inter-bank offers for a market amount of USD for the tenors specified below?”
Page 16: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Calculation Process

2nd Step Ordering of Rates

1st Step Collation of Rates

3rd Step Discard Top/ Bottom Quartiles

4th Step Calculate Moving Average

16 C

ontr

ibut

or B

anks

5th Step Publish IIBR

8

Page 17: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Error Checking

• Central Fixing Support @ Exeter, UK notified of all types of errors per bank contribution

Tolerance

• Difference between the rate and the corresponding moving average within acceptable confidence levels

Standard Deviation

• Anything above the upper and lower limit based on a pre-defined confidence levels will be flagged

Outlier Verification

• Call up contributor and verify the rate. If not available, discretion on Thomson Reuters to accept or reject the rate based on a number of factors

Quality Review and Audit procedures

Tenor Max

Spread ON 0.05 SW 0.05 1M 0.10 2M 0.10 3M 0.10 6M 0.15 9M 0.15 1Y 0.15

9

Page 18: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Governance Framework and Roles

Islamic Interbank

Benchmark Rate

Contributor Panel

Shariah Committee

Fixings Infrastructure

Provider

Islamic Benchmark Committee

Islamic Benchmark Committee •Self governing body that determines selection, admission and exclusion of contributors •Oversees rules, process and procedures for fixing •Review of discrepancies in rate contributions/ periodic review of contributor rate quality •Establishes disciplinary sub-committee when necessary

Contributor Panel • Contributors as chosen by the Islamic

Benchmark Committee • Regulated by the Standard Fixings

Agreement between Thomson Reuters and Contributor

Fixings Infrastructure Provider • Provides the necessary infrastructure in

order to absorb, calculate and distribute the rates contributed by the Contributor Panel

• Reports on the quality of contributions to the Islamic benchmark committee

Shariah Committee • Self governing body that determines

the Shariah compliance of the fixing definition, question, process and procedures

• Voluntary attendance of Islamic Benchmark Committee meetings

10

Page 19: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Governance Committees

*as at 22nd November 2011

Islamic Benchmark Committee

INDEPENDENT MEMBERS*

• AAOIFI (Secretariat) • Association of Islamic

Banking Institutions Malaysia (AIBIM)

• Bahrain Association of Banks

• Hawkamah Institute for Corporate Governance

• Islamic Development Bank • Statistical, Economic and

Social Research Center for Islamic Countries (SESRIC)

• Thomson Reuters

Islamic Benchmark Committee

REPRESENTATIVE BANK MEMBERS*

• Abu Dhabi Islamic Bank • Ahli United Bank • Al Baraka Bank • Al Hilal Bank • Alinma Bank • Al Salam Bank • Bahrain Islamic Bank • Barwa Bank • Dubai Islamic Bank • Ithmaar Bank • Kuwait Finance House • Masraf Al Rayan • Noor Islamic Bank • National Commercial Bank • Qatar Islamic Bank • Sharjah Islamic Bank

Shariah Committee

• Sh Taqi Usmani (Chairman)

• Yusuf Talal DeLorenzo • Mohammed Daud Bakar • Mohammad Abdul Rahim

Al Olama • Muddassir Siddiqui • Prof Abbas Mirakhor • Akram Lalidin

Note: The Shariah Committee works independently from the Islamic Benchmark Committee

11

Page 20: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Selection of Contributor Banks

SELECTING AND ADMITTING

Selection Criteria

1.Primary Preference: Highly Rated Islamic Banks / Windows

2.Secondary Preference: Include active Islamic Banks as nominated / approved by quorum

Admitting

Each bank must sign the Standard Fixings Agreement and acknowledge

•Fixing calculation method and timing of fix •Their responsibility to contribute on every business day

EXCLUDING Thomson Reuters’ Discretion •To protect the quality and integrity of the IIBR, which is of paramount importance

Quality of Contributions •Rate investigation based on outlier status •Certain explanations valid •Inform the Islamic Benchmark Committee and recommend exclusion

•Where objections received or recommended by at least 4 members, form Disciplinary Sub Committee

Delay in Contribution or Missing Contributions

•Banks that are consistently missing contributions may be removed in consultation with the Islamic benchmark committee.

12

Page 21: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

IIBR ON

IIBR 1M

IIBR 3M

IIBR 6M

IIBR 1Y

LIBOR ON

LIBOR 1M

LIBOR 3M

LIBOR 6M

LIBOR 1Y

LIBOR v IIBR

Page 22: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Conclusion

• Decoupling (authentic v cosmetic)

• IIBR published before LIBOR Implications?

• Traction – Legal documents

– Wider use

– Consumer reference

• Looking Ahead – More banks, but limitations- geographic representation

– Local currency

– Wakala

– Dealt rates

Page 23: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Conclusion ll

• Market information, efficiency & good governance are inextricably linked

• Islamic Finance needs a central body to compile and disseminate data & statistics

• Standardisation of securities and instruments is essential for building markets and efficiency

• IIBR is important IF market building block

Source: Hawkamah

Page 24: IIBR: The Trilogy in De-Linking from Conventional Finance · • Bahrain Association of Banks • Hawkamah Institute for Corporate Governance • Islamic Development Bank • Statistical,

Thank You