A group of regional banks have launched the first interbank rate for Islamic finance institutions in an attempt to help move the industry away from the concept of interest, which is prohibited under sharia.
The Islamic Interbank Benchmark Rate (IIBR) has been launched by the banks in cooperation with several Islamic finance bodies and data provider Thomson Reuters.
It is hoped that by using the new benchmark it will enable Islamic banks to move away from using the London interbank offered rate (Libor) to price deals in the Islamic finance sector.
Regional banks including Saudi Arabia’s Alinma and National Commercial Bank, Qatar Islamic Bank and Dubai Islamic Bank are part of the group setting the new rate, which will be based in US dollars.
“This shows that Islamic finance is developing into efficient, mature markets relying on its own benchmarks,” says Sayd Farook, global head of Islamic capital markets at Thomson Reuters.
While the banks involved in setting the rate are already offering pricing under the new sharia-compliant contract, it may be some time before syndicated loans and other Islamic finance transactions are starting to be priced off the new benchmark.
However, short-term pricing under the IIBR is currently lower than the Libor rate, meaning some borrowers may start using the rate to price short-terms loans as it offers a cheaper alternative. “I don’t think it will be too long until people start to use the rate,” says Boyd Winton, director of business development at Bahrain’s Economic Development Board. “At shorter tenors, the rate is currently lower than Libor, so take-up could start soon.”