KUALA LUMPUR, August 15, 2006: Bank Islam Malaysia Berhad (Bank Islam) and Standard Chartered Bank Malaysia Berhad (StanChart) broke new ground in Islamic finance with the introduction of a shariah-compliant financial hedging tool to facilitate their in-house risk management.
The deal is in the form of a Wiqa’ Forward Rate Agreement (WFRA) which enables a floating rate based profit payment to be exchanged for a fixed profit payment for a specific period of time, or vice versa.
Bank Islam’s Managing Director, Dato’ Zukri Samat, said both banks can better manage their portfolio of risks as they benefit from lessened exposure from either fixed or floating rate because of WFRA.
As a result, both banks will be able to better predict financial results and improve their balance sheets, he added.
“This new hedging collaboration is a ground breaking effort for Islamic banking because we will be the first bank in the world to minimize our risk exposure to fixed rate payments, by swapping some of them with a conventional bank for floating rate payments using Wiqa’ Forward Rate Agreement,” said Dato’ Zukri said at a press conference after the signing ceremony here today.
The signing ceremony between Bank Islam and StanChart was witnessed by Deputy Finance Minister II, Datuk Dr. Awang Adek Hussin. Bank Islam was represented by Dato’ Zukri while StanChart was represented by its Islamic Banking Head, Azrulnizam Abd Aziz. Also present were Bank Islam’s Chairman, Tan Sri Dato’ Dr. Abdullah Mohd Tahir.
At the same time, he added, Bank Islam is actively exploring new means to instill better risk practices, even as the bank introduces new financial instruments and services as part of our regional expansion.
Similar to the concept of reinsurance, the WFRA has great flexibility. It allows either Bank Islam or StanChart to participate or exit the floating or fixed rate payments over shorter periods of time and make adjustments in the specific duration, he said.
Meanwhile, Head of Islamic Banking Standard Chartered, Azrulnizam Abd Aziz added that “we are pleased that this effort has once again enabled us to tap our competency in offering innovative solutions with competitive advantages in Islamic Derivatives.
“The Islamic Hedging Solutions from Standard Chartered ensures that customers have access to hedge profit rates risks whilst enhancing their balance sheet management.
“We need innovation in working towards greater integration of the national Islamic banking system with the international Islamic financial architecture – including strategic cross border alliances and collaborations that will enable us to compete better globally.”
Malaysia has the largest Islamic bond market in the world and according to credit-ratings agency Moody’s Investors Service, about US$30 billion of the US$41 billion in Islamic bonds issued globally since 1996 have been arranged and issued in Malaysia.
Globally, there are about US$250 billion worth of assets in Islamic banks and the total is growing 15 per cent a year. Moody’s estimates an additional US$300 billion will be in Islamic mutual funds.
The huge potential in Islamic hedging tools has seen many banks introducing new Islamic financial products such as unsecured Islamic bonds and asset-backed securities linked to a company’s trade receivables.