The Islamic Interbank Benchmark Rate (IIBR), announced at the 18th Annual World Islamic Banking Conference in Bahrain, uses the contributed rates of 16 Islamic banks and the Islamic sections of conventional banks to provide a reliable and much-needed alternative for pricing Islamic instruments to the conventional interest-based benchmarks used for mainstream finance.
The USD 1 trillion Islamic finance industry is currently growing at more than 15 per cent per annum. It is frequently a topic of conversation for regulators, international lending agencies, bankers and asset managers in G-20 countries, as well as 57 Muslim countries, for raising asset-backed or asset-based funds.
"The delinking from conventional performance benchmarks started more than a dozen years ago and now we are extremely proud to offer the world's first Islamic pricing benchmark, the Thomson Reuters Islamic Interbank Benchmark Rate," Rushdi Siddiqui, global head of Islamic finance, Thomson Reuters, said.
"We have taken a collaborative approach as industry challenges are best solved by industry players working toward a common objective," he said.
"The simplicity and robustness of the new benchmark's methodology, governance and transparency, combined with the endorsement of many respected Islamic financial institutions and scholars, will result in a reliable and realistic benchmark that better measures cost of funding for Islamic financial institutions," he added.
"Together we are taking an important step forward for Islamic finance authenticity," Siddiqui said.
Implementation and the integrity of the benchmark will be overseen by an Islamic benchmark committee of over 20 Islamic finance institutions, chaired by Nasser Saidi, chief economist of the Dubai International Financial Centre (DIFC), and a Shariah Committee consisting of four world-respected Shariah scholars.
Nasser Saidi, the chair of the Islamic Benchmark Committee and chief economist of the Dubai International Financial Centre, said: "The establishment of the IIBR marks an important milestone in the maturation of Islamic money markets by providing an international reference rate for inter-bank transactions. Conventional money markets have relied on LIBOR, which by definition does not comply with Shariah conventions." "Islamic markets will be able to rely on the IIBR and it will become an international reference rate for both conventional and Sharia-compliant transactions. Our aim is to provide an IIBR that is reliable, timely, representative of market conditions, transparent in its construction and accepted as the market reference," he said.
"Islamic money and financial markets are coming of age and becoming part of the mainstream," he added.
Established in cooperation with the Islamic Development Bank (IDB), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Bahrain Association of Banks (BAB), Hawkamah Institute for Corporate Governance and a number of major Islamic banks, the IIBR harnesses Thomson Reuters global benchmark fixings infrastructure, which is used to compile over 100 fixings around the world.
"The Islamic Development Bank has been a founding member of the Islamic finance industry since its inception in 1975 and the launch of this indigenous Islamic benchmark will prove to be a major milestone in the growth and sustainability of the industry," said Islamic Development Bank Treasury Department Director Hassan Demirhan.
"As the global standard-setter for the Islamic finance industry, the AAOIFI is keen to support initiatives that progress the industry toward standardised approaches around the consensus of its members.
"Given the support we have received from the industry globally, particularly the main Islamic banks which will contribute toward and utilise the rate, AAOIFI is proud to be associated with this initiative which will certainly be defined as an important milestone for the Islamic finance industry in years to come," said AAOIFI deputy secretary general Khairul Nizam.
The new benchmark can be used to price a number of Islamic instruments, including common overnight to short-term treasury investment and financing instruments such as Murabaha, Wakala and Mudaraba, retail financing instruments such as property and car finance and sukuk and other Shariah-compliant fixed income instruments.
It can also be used for the pricing and benchmarking of corporate finance and investment assets