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The IFSB Working paper on Regulatory and Supervisory Issues in Sharī`ah-Compliant Hedging Instruments

Date posted: 24 December 2019

Kuala Lumpur, 24 December 2019 – The Islamic Financial Services Board (IFSB) today issued its 14th research in the Working Paper series, WP-14: Regulatory and Supervisory Issues in Sharī`ah-Compliant Hedging Instruments.  This working paper investigates the existing practices in relation to the use of Islamic hedging instruments and the regulatory and Sharī`ah compliance concerns raised across IFSB jurisdictions. 

The Secretary-General of the IFSB, Dr. Bello Lawal Danbatta stated, “This Paper is the fifth issuance in the IFSB’s Working Paper series this year”. He further added, “Sharī`ah-Compliant hedging instruments, tools and strategies not only align with the operationalisation of a number of Islamic contracts for the purpose of minimising risks, but also are in sync with one of the essentials of the Sharī`ah, which is to protect wealth. As such, this working paper provides some exploratory findings on the regulatory and supervisory issues arising from hedging instruments being used in a variety of ways in several jurisdictions, essentially as a Shari’ah-compliant alternative to conventional derivative instruments”

The findings in WP-14 reveal that the risk profile of institutions offering Islamic financial services (IIFS) is not much different from that of the conventional banks, and thus credit risk, liquidity risk and rate-of-return risk were the main risks for Islamic institutions. Asset–liability alignment and wa’d emerged as the main hedging tools; however, in general, IIFS were either not using hedging instruments or lacked the motivation to utilise them. 

WP-14 also reveal that about half of the IIFS surveyed were aware that specific regulations pertain to the use of Islamic hedging instruments; however, since the regulations were not standardised across the globe, the application of hedging instruments was minimal.

WP-14 is available for download from the IFSB website: www.ifsb.org.

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