Welcome signs that the sharia banking sector is entering a new age of maturity
The introduction of an Islamic alternative to the London interbank offered rate (Libor) is a great step forward for the sharia-compliant finance sector.
The leakage of sharia deposits into the conventional banking system is thought to be several billion dollars each year. Yet, however much the industry is calling for the development of its own benchmarks, the success of the rate, known as the Islamic interbank rate (IIBR), is still far from assured.
For that to happen, it needs to be widely adopted by sharia-complaint banks for transactions, such as syndicated loans and sukuk (Islamic bond) deals. How long that will take is unclear.
At present, there are few signs that dealmakers are about to start using the rate, but that could quickly change.
To be a success, international banks will need to get on board. So far, they have not.
The attraction of the rate will come in how it compares with Libor. At present, IIBR is lower over shorter maturities, making it a better rate to price deals off. Longer tenors are more expensive, however, which will deter people from using the rate.
Although the move is a welcome sign that the Islamic finance sector is maturing and divorcing itself from the conventional finance market, the relationship is not over yet.
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