COMMODITY MURBAHA or ORGANIZED TAWARUQ where do you stand??

[Maan Barazy]

Reuters publishe d the following comment on commodity murabaha

Although commodity murabaha is widely used, it faces opposition 

from some Islamic scholars on the boards which oversee banks' 

activities. The practice is criticised as not sufficiently based on real 

economic activity, a key principle in Islamic finance.

"Sharia boards are driving this - in the UAE, most banks are shying 

away from commodity murabaha," said Husam Saif, head of treasury 

and capital markets at Manama-based Khaleeji Commercial Bank.

Opposition to commodity murabaha crystallised when Oman issued 

regulations last December covering its fledgling Islamic finance 

industry. It essentially banned commodity murabaha, also known as 

organised tawarruq.

One possible solution for banks is to improve the way they conduct 

commodity murabaha to make it "stronger" or more closely aligned 

with sharia principles. This month, the Dubai Multi

Commodities Centre (DMCC) offered a way to do this by launching 

an Islamic trading platform.

The DMCC argues that its platform permits stronger murabaha by 

tracking the ownership of commodities in a way which gives 

assurance that an actual exchange of commodities is occurring, 

rather than just a paper transaction.

Another potential advantage for Gulf banks is that the DMCC is close 

to home; this allows same-day settlement and means legal recourse 

to assets can be secured, said Kazim Ali, head of corporate banking 

at Dubai-based Noor Islamic Bank.

"It's a very positive development - from an interbank perspective it 

allows banks to make regional transactions, which makes it more 

efficient."

Ali said his bank planned to extend its use of the DMCC platform 

from interbank deals to include transactions with individual clients.

"What we plan to do is customer murabahas in this platform. Besides 

interbank and direct customer transactions, the bank will also 

consider commodity financing. This has great value for the industry."

ALTERNATIVES

At the same time, some banks are exploring alternatives to 

commodity murabaha. Islamic contracts such as wakala (agency) 

agreements are gaining popularity, and appear to be garnering a 

larger share of interbank markets, although official data are not 

available.

Saif at Khaleeji estimates commodity murabaha volumes in the Gulf 

vary daily between $8 billion and $11 billion, while wakala contracts 

could be edging close to a third of that volume.

Wakala, where one party acts as an agent for another to manage a 

pool of assets, will soon have a standardised agreement being 

developed by the IIFM, Alvi said.

"Our unrestricted wakala documentation standard is under 

finalisation, and it will be most likely published before Ramadan 

(July), if not earlier."

The IIFM has also developed standards for Islamic hedging, and it is 

developing a collateralisation standard for the use of tradeable sukuk 

(Islamic bonds) in liquidity management, Alvi added.

Qatar took a step towards facilitating the use of sukuk for banks' 

liquidity management this month when it launched a regular 

programme of quarterly sukuk issuance.

Next in line could be Oman, which having banned commodity 

murabaha is now considering other ways for its banks to park their 

funds.

"Most probably it will be some type of tradeable sukuk, either ijara- or 

equity-based" said Jamil Jaroudi, chief executive of Bank Nizwa, 

Oman's first Islamic bank. Ijara is an Islamic leasing structure.

Bank Nizwa ultimately plans to use a mix of wakala and tradeable 

sukuk to manage its funds, Jaroudi said, as well as murabaha deals 

with regional Islamic banks conducted outside Oman.

Oman's first sukuk may take some time to become available, 

however; central bank chief Hamood Sangour al-Zadjali said this 

month that rial-denominated sukuk were likely to be issued towards 

the end of 2013 or at the start of next year.