Economy, Business And Markets

Islamic Repo Agreement Can Help Improve Interbank Market

Islamic Repo Agreement Can Help Improve Interbank MarketIslamic Repo Agreement Can Help Improve Interbank Market

Iran's central bank is trying to enhance the interbank market by using new instruments, like Islamic repo agreements, which would also help “form a debt market in the country,” according to the head of Monetary and Banking Research Institute, Ali Divandari.

“Interbank market has a key role in the financial markets, as most of the financial assets are sold in that market where base prices are set,” he was quoted as saying by the research institute's official website during a seminar on the role of repo agreements in Islamic interbank markets, hosted by the MBRI this week.

“Currently, standing deposits are the only common instruments in the market, and introducing new instruments will help,” Divandari added.

Abbas Mousavian, a member of the Central Bank of Iran Fiqh Council sought to explain the unique features of Islamic repo agreements that set them apart from their conventional counterparts.

In conventional repos, an investor borrows an asset for a predetermined period during which he receives income from it. The very phrase "Islamic repo" is controversial among some scholars who fear the instruments might simply replicate conventional financial products without addressing the chronic economic needs.

Calculating margin calls on repos may be problematic since it can be seen as using an implicit interest rate. Trading the assets behind repos with third parties could be disallowed by some scholars because of Islam's ban on pure monetary speculation; this makes Islamic repos less attractive economically.

"Islamic repo can set itself apart from the traditional ones by drawing close to the real economy to include the trade of legitimate securities like sukuk and participatory bonds," Mousavian said.  

The first Islamic repo was launched by the National Bank of Abu Dhabi (NBAD) and the Abu Dhabi Islamic Bank (ADIB) in 2011.

Ali Asghar Mirmohammad Sadeqi, head of credit department at the CBI, said that the central bank has been working on the development of new instruments for the interbank market “because the market needs new instruments.”

The total value of the transactions in the market has reached 120 trillion rials ($ 3.5b) per day,” he said adding that the interbank lending rate now is 17.5%.”