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RUSHDI SIDDIQUI GLOBAL HEAD ISLAMIC FINANCE & OIC COUNTRIES RAFIZA GHAZALI HEAD OF ISLAMIC FINANCE,ASIA ABDULAZIZ GONI ISLAMIC FINANCE TEAM, ASIA 9th March, 2012
NOTE: The information herewith is provided for the purpose of general discussion and should not be used as a reference for research and republished and redistributed without the consent of the author
Law of Necessity
Indigenous development
Pre-IIBR Comments
Same as LIBOR
Islamic Finance getting out of its Comfort Zone Arbitrage Banking and Islamic can't go together unless it is zero percent rate or the return is not fixed but arbitrary Resistance to change Over reliance on usage of LIBOR rates.
DIB scenario
Institution Name : Dubai Islamic Bank (DIB) Average Daily Volume 5 days Index Credit Deposit Rating (M AED) Loans (M AED) As Nov at 2011 64,771.32 As at Nov 2011 65,944.47 Emirates NBD saves troubled Dubai Islamic Bank % Change YTD News Stock Price
5,641,024.60 S & P GCC A Islamic Fitch Composite Index BBB/ A-3 S&P
Source: Thomson Reuters
+11.86
Pricing Benchmarks
Leading indicators
An economic indicator that changes An economic indicator that changes before the economy has changed. after the economy has changed. Is LIBOR a leading or lagging indicator? Why? Is stock performance a lagging indicator? Are Bond yields a leading or lagging indicator? Is the unemployment rate a leading or lagging indicator? Is the Consumer Pricing Index (CPI) a leading or lagging indicator? Is the value of commercial and industrial outstanding loans a leading or lagging indicator?
Reference Rate
LIBOR and country interbank rates:
Short term treasury investments Retail finance
Property, vehicle, etc
Corp/Sovereign finance
Sukuk iSyndicated Loans
History of LIBOR
The London Interbank Offered Rate otherwise known as LIBOR is An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association (BBA).
LIBOR is calculated and published by Thomson Reuters. Controversy with LIBOR include the fear of manipulation of rates by BBA members when first
Whether LIBOR could give an accurate picture of the British financial market.
IIBR?
Scalability Sustainability
40 Years $1T $150B Sukuk $87B iLoans $37-52B iFunds G20 over OIC Presence
A.I.R. Abilities?
Regulations(ters) Stock Exchanges Derivatives Listed Products Deposit Insurance Lender of Last resort IFRS/GAAP
AEIBOR
BHIBOR
KIBOR
USD LIBOR
0.86
De-linking begins
IIBR v LIBOR
Is IIBR a proxy for ME cost of Islamic funds?
20
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
Participating Institutions
A MARKET FROM WORLD INVOLVES THE THE A LARGEST ISLAMIC PARADIGM FIRST FOR THE MARKET BANKS SHIFT
What
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 SundayThursday
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 banks real financing and investment activities
3
Interbank transaction
Benchmark securities issuances to the Islamic rate eventually less reliant on the conventional banking system and its pricing
Rates incorporated in TR Dealing
Rates Data
By 10.45am Makkah time
IIBR
By 11.00 am Makkah time
Fixing
Arithmetic Mean (Average) Taken
Audit Committee
Shariah Committee
Sh. Yusuf Talal Delorenzo (Chairman); Dr. Abdulrahim Sultan Al Olama; Dr. Mohammad Daud Bakar; Sheikh Muddassir Siddiqui
Automated and Manual Audit and Review Procedures (Errors / Tolerance / Std. Dev / Call)
Calculation Process
1st Step
Collation of Rates
2nd Step
Ordering of Rates
3rd Step
4th Step
5th Step
Publish IIBR
16 Contributor Banks
Error Checking
Tolerance
Difference between the rate and the corresponding moving average within acceptable confidence levels
Tenor ON SW 1M 2M 3M 6M 9M 1Y
Standard Deviation
Anything above the upper and lower limit based on a pre-defined confidence levels will be flagged
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 Outlier factors Verification
Max Spread 0.05 0.05 0.10 0.10 0.10 0.15 0.15 0.15
Contributor Panel
Contributor Panel Contributors as chosen by the Islamic Benchmark Committee Regulated by the Standard Fixings Agreement between Thomson Reuters and Contributor
Shariah Committee
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
Governance Committees
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
Shariah Committee
Yusuf Talal DeLorenzo (Chairman) Mohammed Daud Bakar Mohammad Abdul Rahim Al Olama Muddassir Siddiqui
Note: The Shariah Committee works independently from the Islamic Benchmark Committee
11
EXCLUDING
Thomson Reuters Discretion To protect the quality and integrity of the IIBR, which is of paramount importance
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
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
32
1.20
1.00
IIBR ON IIBR 1M
0.80
IIBR 3M IIBR 6M
0.60
IIBR 1Y
LIBOR ON LIBOR 1M
0.40
LIBOR 3M LIBOR 6M
0.20
LIBOR 1Y
0.00
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