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SLAMIC FX FORWARD
SUBMITTED BY
MD.MIRAN SHAH CHOWDHURY,MBA,ACI
AL-ARAFAH ISLAMI BANK LIMITED
INTERNATIONAL DIVISION
PHONE: O88O27167237
EXECUTIVE SUMMARY
Definition: Under the WAD (Promise) structure, only one party (Obligor /
Promisor) promise to buy/sell as the case may be wherein he is
bound by that promise (Binding Promise).
Salient features:
• A Unilateral Promise by clients on Deal date followed by akad(settlement)
on value date.
• To buy or sale one currency against another.
• To assist business to mitigate risk against genuine underlying assets of
banks and clients.
• At an agreed rate determined on spot/majlis for future delivery.
• To protect against unfavorable movement of exchange rate.
• Akad on Value date/for delivery/settlement on agreed future date or within
the period of promise.
• Not allowed to get benefit from favorable movement of the currency
• Bank has the right to claim for actual losses on MTM on termination date.
Dealing Procedure:
• At the time of Deal ,the Client will uniliterly promise to buy/sell currency at
future date at the price determine on Promise date.
• Before Two days’ of maturity, either Bank or Customer will send Offer
letter to exchange Currency for settlement of Islamic FX Forward.
Documentation:
• Master agreements/terms & conditions
• Promise to purchase/sale
• Offer to buy/sale
• Acceptance to buy/sale
Settlements:
On value date/Maturity date, the client will need to deliver his currency to banks
in clear FC funds. The Islami Bank will in turns deliver the agreed amount of the
other currency in accordance with client’s instructions complying the documents.
The value of foreign currencies in handling Foreign Exchange business does not
remain stable. Such fluctuation affects the importers, exporters and
Remitter/Exchange houses. At present, the problem being aggravated due to
excessive volatility/fluctuation of exchange rates in both upward & downward
directions that expose the Clients/Banks to the risk of significant loss. The clients
of Islami Banks in Bangladesh can not take forward coverage against fluctuations
of Foreign Currency, consequence of which the face loss and can not compete
with the Clients of Conventional bank(s) who can take forward Coverage against
fluctuations of Currencies price. Sometime, the Clients of Islami bank takes
Forward Coverage directly from Conventional bank. So, it is a pertinent need for
islamically approved/acceptable derivatives to neutralize the risks of Bank/Clients
against FC dominated genuine commercial transactions. As such, the present
study is designed Bangladesh bank to address the Islamic alternative of
traditional forward contract supported by fatwa of Accounting and Auditing
Organization for Islamic Financial Intuitions (AAOFI) and opinion/views of Islamic
jurisprudences and scholars for kind consideration.
03. Problem/Underlying Price risk faced by Islami Banking
Industry:
• Export bills: Bank Buys Export bills (Sight/Usance) from Clients paying
BDT at spot and run the exchange rate risk until realization of proceeds in
FC.
• Problem in managing Exchange position: The purchase of Export
bills are to show in Assets side of Exchange Position which engulf the Open
position limit to a great extent against which Islamic bank can not take any
Forward Coverage to square up position.
For example if a particular currency is required on 1st July, 2010,we can not have
a confirmed sale today but today we could state that we agree/promise to buy a
specific currency at a specific rate on 1st July,2010 and the seller could state that
we promise/agree to sell a specific currency at a specific rate on the said date.
We have sold/Purchased
We promise/agree to buy
Through the simple change the whole transactions would be in accordance with
shariah.
Moreover, there is no restriction in the shariah with respect to fixing the rate in
advance. There is also no need to get into the detail as to what factors the
counter parties have taken into consideration whilst fixing such rate.
Unquote:
5.02 Kuwait Finance House (Malaysia) berhad
Quote
10.00 Documents
• Master agreements/terms & conditions (Annexure-05)
• Promise to purchase/sale
• Offer to buy/sale
• Acceptance to buy/sale
11.00 Security:
• Urbun / Earnest money: To minimize the risk of counterparty for non
performance of promise, the client will pay only a small part of the price of the
commodity at the time of entering such transactions on the understanding
that the Bank will retain the amount as margin till maturity of the
transactions. If the deal(s) is/are not finally concluded, the Bank will
recompense the actual loss of liquidity from Urbun A/C of Clients. If there is
reminder to be retuned to the clients and if the retained amount is insufficient
the client should pay the rest.
• Presently, the Thomson Reuters Limited are quoting Profit Rate/rate of return
on different Islamic product traded in the global market especially on
Commodity Murabah on major currency(s) on different Islamic principles
which may be considered as Islamic benchmark rate of Foreign Currency(s)
leg. ( Reuters Code:…….)Therefore, the Rate of return of FC RR with that of RR
of BDT Mudarabah rate may be considered as profit rate differential for
adjustment with Spot Rate.
• The Islamic Banking Industry depends on Conventional Cost of capital which is
not technically violation of Shariah but has to develop its own set of rate of
return.(AAOFI Resolution-Annexure…6(a)(b)
On value date/Maturity date (Date when exchange of currency takes place), the
client will need to deliver his currency to banks in clear FC funds. The Islami Bank
will in turns deliver the agreed amount of the other currency in accordance with
client’s instructions complying the documents.
15.00 Conclusion:
Considering the need for both Bank’s & Clients and the shariah aspects explained
in this paper, we propose that Islamic FX Forward (Propose name : Islamic
Promissory FX) may work flexibly than Traditional Forward Contract .