Sharia banks may get hedge
funding tool next year

Member countries of the International Islamic Financial Market (IIFM) may soon enjoy a hedging facility to reduce risks of financial transactions, officials say.

The IIFM’s Board of Directors agreed on Monday to implement a hedging facility for the sharia banking industry in the first half of next year amid global currency concerns.

Bank Indonesia’s director for sharia banking, Mulya Siregar, said that IIFM member countries would sign a master agreement, called a tahawwut agreement, to accommodate the hedging facility.

“The tahawwut agreement to be signed by IIFM member countries will minimize time and costs and make transactions faster,” he told reporters at 23rd IIFM Board of Directors Meeting at the central bank’s offices in Jakarta.

The agreement, according to Mulya, was needed to ease the risks of currency-related transactions amid currency concerns affecting both developed and emerging economies.

Hedging is a risk management strategy used to limit or offset the probability of loss from fluctuations in the prices of currencies, commodities, currencies or securities.

Ijlal Alvi, IIFM’s CEO, said that banking transactions were greatly influenced by risks from exchange rate fluctuations, and hedging facilities were thus needed to protect transactions from currency risks.

IIFM is a global standardization body that focuses primarily on the standardization of Islamic products, documentation and related processes.

The membership of the Bahrain-based organization is comprised of representatives from 50 central banks and financial institutions from many countries, including Sudan, Brunei Darussalam, Pakistan, Malaysia, Bahrain and Kuwait.

Although sharia banks currently have a 3.1 percent share of the local banking industry, Islamic-based financial institutions have been growing very rapidly in Indonesia, according to reports.

The total assets of sharia banks rose by 43 percent to Rp 85.9 trillion in the first nine months of this year after several banks split their shariah banking divisions into separate banks.

The central bank forecasts sharia banking assets would grow to Rp 97 trillion at the end of 2010, or a 43 percent increase year-on-year.

According to BI data, sharia financing reached Rp 61 trillion up to September of this year. (est)

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