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An insight into financial benchmark reforms for Islamic finance

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Date
2022
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Abstract
Islamic finance ought to follow Shari'ah in all dimensions of it including regulatory, substantive and procedural matters of it. However, since the inception of the institutionalization of Islamic finance, it has been criticized for using conventional interest rates to benchmark its financial products. Irrespective of the criticisms made in this regard, from a Shari'ah perspective, this practice of Islamic finance has been defended and therefore, the practice continued until in July 2017 it was announced that there is a need to move away from LIBOR as an interest rate benchmark before the end of 2021. This announcement led to the creation of various risk-free rates and highlighted an opportunity to bring some reforms to Islamic finance by introducing financial benchmarks that could be compatible with Islamic finance principles. Therefore, the objective of this paper is to provide insight into the financial benchmark reforms required for Islamic finance by providing a review and preview of the topic using a desk review qualitative approach. The findings of this paper indicate that there could be no single benchmark that could be uniformly used for Shari'ah compliant financial products, and there is a need to introduce specific benchmarks for different types of Shari'ah contracts used in structuring Islamic finance products. It is expected that the findings of this paper would assist in understanding the theory and practice of implementing Islamic alternative benchmark to the London Inter-Bank Offered Rate (LIBOR) and would motivate regulatory authorities and standard setting bodies to consider enacting financial benchmarks that will reflect the behaviour of Islamic finance products and the underlying Shari'ah contract(s) used to structure them.
Keywords
Financial benchmark , Islamic finance , Reform , Shari'ah compliant financing
Citation
Hassan, M. K., Muneeza, A., & Mohamed, I. (2022). An insight into financial benchmark reforms for Islamic finance. Journal of Islamic Finance Accountancy (JOIFA), 7(1), 21-33.
Publisher
AAOIFI
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