A group of Indonesian Islamic banks launched on Thursday a standard contract template for sharia-compliant repurchase agreements, aiming to broaden the liquidity management tools available in the sector.
The standard will serve as an alternative to interest-based repurchase agreements, which are common money market tools used by conventional banks but are largely absent in Islamic finance.
Currently Islamic banks in Indonesia rely on tools provided by the central bank, such as an Islamic overnight deposit facility known as FASBIS, while the new agreement would standardise bank-to-bank transactions and help ensure they are cost-effective.
An initial group of 18 Islamic banks and Islamic banking units are signatories to the master agreement, which allows use of government-issued Islamic bonds (sukuk) as collateral while tenors can be of no more than one year.
“Because we are using underlying (assets), we estimate that the repo rate will be lower (cheaper),” said Ahmad Badawi, head of the Indonesian Islamic Global Market Association.
“There is a possibility that this is above FASBIS for overnight but below interbank financial market price.”
The move follows the launch in November of a standard contract template for collateralised transactions by the Bahrain-based International Islamic Financial Market (IIFM), where Indonesia’s central bank is a founding member.
Sharia-compliant alternatives to repos remain scarce. Malaysia and Bahrain have their own approaches which are approved at the domestic level and limited to local-currency collateral.
Conventional repos allow institutions to lend out assets for short periods to generate liquidity, but this is disallowed in Islamic finance as it entails the charging of interest.
Collateral is often lent out by custodians, a practice known as rehypothecation, which also contravenes Islamic principles.