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DFM adds significant risks in Islamic finance on hedging standards

Image used for illustrative purpose. An investor holds the tasbeeh as he monitors electronic boards displaying stock information at the ADX Abu Dhabi Securities Exchange stock market.

Image used for illustrative purpose. An investor holds the tasbeeh as he monitors electronic boards displaying stock information at the ADX Abu Dhabi Securities Exchange stock market.

Reuters/Stringer

Sunday, Mar 19, 2017

Dubai: Dubai Financial Market (DFM) said it has officially published the final version of its Standard on Hedging against Investment and Finance Risks, the first comprehensive standard of its kind, as part of the DFM’s constant efforts to further enhance the guiding framework of Islamic finance and capital markets.

This standard is the newest addition to DFM’s Sharia-compliant standards, which include Standard on Stocks and Standard on Sukuk issued in 2007 and 2014 respectively, the DFM said in an emailed statement.

The key amendments and add-ons to the draft of the standard are adding two types of risks, which are among the most significant risks in Islamic finance and investment. These are the property risk, which must be borne by the owner so that he becomes liable for the damage or loss of his property, and the reputational risk, which relates to Shari’a incompliance.

The ammedments also emphasises that when the remaining unpaid instalments become due as a consequence of some failure in debt repayments, the nature of the finance originally given has to be taken into consideration, for the creditor is not allowed to receive more than the amount of debt owed.

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The amendment also Emphasises on the admissibility of the penalty clause only in Istisna, supply contracts and labour-lease contracts, excluding the contracts that result in a monetary debt owed by the debtor.

The changes further validates the letter of guarantee and the documentary credit are meant to address the risk of non-payment.

Contract of partnership

It also emphasises on the admissibility of the third-party guarantee in contracts of partnerships, Mudaraba and agency in investment, provided no link is made between this guarantee and the contract of partnership or Mudaraba.

“Building upon what has been achieved in the past, the official launch of the Hedging Standard, combined with the previously issued Stocks and Sukuk Standards, will strengthen the framework environment for the Islamic finance sector. It will further boost Dubai’s impressive successes as the capital of Islamic economy globally,” Essa Kazim, Chairman of DFM, said in a statement.

“Moreover, this significant step underlines DFM’s effective role in providing Shari’a-compliant standards considering its status as the first Sharia-compliant exchange globally since 2007. DFM’s Standard on Hedging will provide an important reference for Islamic banks and financial institutions as we believe that such standards will further stimulate the rapidly growing Islamic finance industry,” said Kazim.

Staff Report

Gulf News 2017. All rights reserved.

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