The Islamic Financial Services Board (IFSB) has issued its 14th working paper series, WP-14: Regulatory and Supervisory Issues in Sharī`ah-Compliant Hedging Instruments.
This working paper investigates the existing practices in relation to the use of Islamic hedging instruments and the regulatory and sharī`ah compliance concerns raised across IFSB jurisdictions.
The Secretary-General of the IFSB Dr Bello Lawal Danbatta noted that the document is the 5th IFSB Working Paper issued in 2019. He added, “Sharī`ah-compliant hedging instruments, tools and strategies not only align with the operationalisation of a number of Islamic contracts for the purpose of minimising risks, but also are in sync with one of the essentials of the sharī`ah, which is to protect wealth.
"As such, this working paper provides some exploratory findings on the regulatory and supervisory issues arising from hedging instruments being used in a variety of ways in several jurisdictions, essentially as a shari’ah-compliant alternative to conventional derivative instruments.”
WP-14 reports that the risk profile of institutions offering Islamic financial services (IIFS) is not much different from that of the conventional banks, and thus credit risk, liquidity risk and rate-of-return risk are the main risks for Islamic institutions. Asset-liability alignment and wa’d (وعد, pledge) emerged as the main hedging tools; however, in general, IIFS were either not using hedging instruments or lacked the motivation to utilise them.
WP-14 also reveals that about half of the IIFS surveyed were aware that specific regulations pertain to the use of Islamic hedging instruments; however, since the regulations were not standardised across the globe, the application of hedging instruments was minimal.
Details:
WP-14 is available for download from the IFSB website.