Islamic Finance

IFSB Working Paper on Regulatory and Supervisory Issues in Shariah-Compliant Hedging Instruments

Kuala Lumpur, 24 December 2019 – The Islamic Financial Services Board (IFSB) today issued its 14th research in the Working Paper series, WP-14: Regulatory and Supervisory Issues in Shariah-compliant Hedging Instruments.  This working paper investigates the existing practices in relation to the use of Islamic hedging instruments and the regulatory and Shariah compliance concerns raised across IFSB jurisdictions.

The Secretary-General of the IFSB, Dr. Bello Lawal Danbatta stated, “This Paper is the fifth issuance in the IFSB’s Working Paper series this year”. He further added, “Shariah-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 Shariah, 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 Shariah-compliant alternative to conventional derivative instruments.”

The findings in WP-14 reveal 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 were the main risks for Islamic institutions. Asset–liability alignment and wad 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.

WP-14 is available for download from the IFSB

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