The Master Agreements for Treasury Placement (MATP) are a benchmark that offers standardised documentation. Robin Amlt reports on a global first for the Islamic finance industry.
The Master Agreements for Treasury Placement (MATP) are a major initiative facilitating the unification and growth of the Islamic financial services industry. The MATP is a landmark initiative for standardising the commodity Murabaha, a tool customarily used by Islamic institutions for Shari'ah -compliant liquidity management.
Although Murabaha is one of the oldest structures in Islamic finance, it is not uncommon for documentation to vary from institution to institution and even within banks to have more than 20 variations in product.
Interpretation is a key factor in Islamic finance. It is important when discussing matters of faith to respect divergent opinion. The issue facing the Islamic finance industry is a shortage of scholars. The problem is the workload they face on reviewing basic products. This means that scholars have not had time to help drive business forward. Ijlal Ahmed Alvi, Chief Executive Officer of the International Islamic Finance Market (IIFM) said, "Islamic market efficiency cannot be improved without standardisation."
Transactions
Standardisation of basic contracts will help in reducing scholars' existing workload, something that is essential if Islamic finance is to move to the next stage and develop new products, especially new risk management product to cater to Islamic risk.
The adoption of the MATP will enhance cost, time and operational efficiencies of Shari'ah- compliant deposit arrangements. The initiative caters to the Shari'ah-compliant commodities market, which represents, in some cases, 90 per cent of commodity Murabaha transactions. The agreements cover principal to principal as well as agency arrangements. The global commodity Murabaha market estimated to be currently worth more than $100 billion.
The agreement is the culmination of consultation with more than 40 regional and international market participants. The project was driven by the IIFM's Shari'ah Panel consisting of several leading scholars while the Dubai International Financial Centre (DIFC) and the Central Bank of Bahrain played key roles in facilitating the complex agreement. The DIFC hosted the final review of the MATP by the scholars of the IIFM Shari'ah Panel on 14 August, 2008 .
Nasser Al Shaali, Chief Executive Officer of the DIFC Authority said, "The MATP represents a significant milestone in the development of the global Islamic Finance industry. As part of DIFC's mission to catalyse the growth of the regional capital market, we will be seeking to raise awareness and understanding of the MATP not just within the financial district but across the region. The agreement will facilitate more harmonious practices, lower costs and greater clarity for institutions involved in commodity Murabaha transactions. It will give a significant boost to the growth of the Islamic financial services industry and the development of Islamic capital markets across the world."
Standardisation and harmonisation are the keys to the future growth of the Islamic finance industry. Nasser Al Shaali added that products need to be "structured, dependable, standardised". While Islamic finance continues to grow at the rate of 15 to 20 per cent a year and is widely believed to be worth around $1 trillion, it remains a very small percentage of the total world capital market value.
Bottleneck
Simon Eedle, Global Head-Islamic Finance of Calyon in Bahrain notes that many countries are rapidly removing what he described as the "unintended tax prejudice" that has hampered Islamic financial products. "We're reaching a point of critical mass... current market conditions are going to assist growth," he added.
Qudeer Latif, Head of Islamic Finance, Clifford Chance, offered an overview of the MATP. Underlining the need for standardised contracts he outlined how the MATP would assist in reducing transaction costs allowing more competitive pricing which should lead to an increase in the volume of deals.
The key bottleneck facing the growth of Islamic finance is the limited number of scholars. A standardised contract will alleviate the burden on scholars while at the same time improving documentation standards and mitigate the risks of any legal challenge to the contract.
The MATP has already been accepted in principle by more than 40 institutions from the United Arab Emirates, the Gulf Cooperation Council region and international players as well - a factor that should help improve confidence in the sector.
Harmonising execution will speed up deals allowing Islamic institutions to deal with clients more quickly, making for a more competitive and more responsive market place and leaving institutions with the time to focus more effectively on more complex products.
Two basic structures are in place within the MATP. The first (Structure 1) consists of three back-to-back transactions: a deposit made by a client; a purchase by the client through a broker and then a sale through the financial institution to a second broker.
The second (Structure 2) may be made available to clients who have no pre-existing relationship with a commodity broker. In this case a bank or financial institution acts as a buying agent for the depositor.
Culmination
Three standard documents cover the transactions.
A Commodity Purchase Letter of Understanding covers the initial sale of the commodity to the client by Broker A.
A Master Murabaha Agreement covers the sale of the commodity to Broker B by the financial institution.
The third document, a Master Agency Agreement for the Purchase of Commodities, only comes into the equation to cover the commodity purchase made under Structure 2.
The MATP is the culmination of two years' work. A working group met for the first time in November 2006.
A further seven working group meetings and seven Shari'ah meetings followed. The Fatwa was signed by the IIFM Shari'ah Panel at a meeting in Jeddah on 7 September 2008 and the documentation was launched to the Islamic finance industry on 8 October 2008. The IIFM is now planning to establish a working group process to review hedging as the next area for standardisation.The team of scholars making up the IIFM Shari'ah Panel which gave its assent to the MATP includes:
Dr Hussain Hamed Hassan
Sheikh Nizam Yaquby
Sheikh Essam Mohammed Al Sheikh Ishaq
Sheikh Dr Ahmed Ali Abdullah
Sheikh Dr Layachi Sadek Faddad
Sheikh Dr Mohammed Burhan Arbouna
Sheikh Dr Mohammed Daud Baker
Sheikh Dr Mohammad Imran Ashraf Usman
Islamic Business and Finance 2008
