Read on Twitter
HOLIDAY SPECIAL: COMMODITY BASED "REPO" MARKETS Been sitting on this one for a while, but in the spirit of the season, let's take a look at the strange and exciting world of commodity based repo-like transactions and do some unwrapping!
The rise in prominence of Islamic finance institutions, and conversion of some key EM players into fully Islamic banks has made funding transactions complying with Islamic finance conventions a fast growing market: https://www.ibtimes.com/saudi-arabias-largest-bank-national-commercial-bank-convert-fully-islamic-bank-1707691?ft=74gk7
It is general consensus among Sharia boards that deferred payment for the sale of hard assets does not equal the payment of interest & thus permissible for Islamic finance institutions. This forms the basis of the commodity murabaha, often the default structure in these markets:
How this works is the funding party (here labelled "Bank"), purchases commodities on the open market and sells them to the borrowing party (here labelled "Customer") for future payment. The borrower then sells into the open market for cash and repays the funder as agreed.
Now that we got the mechanics down, let's see how this works irl! Tho often given the option, borrowers almost never take delivery of the assets and usually allow the funder to sell on their behalf, allowing the buy, deferred sale, and sale to occur effectively instantly:
Furthermore, there is usually a third party firm that facilitates clearing and provides trading infrastructure, such as Ableace Raakin in Malaysia or DMCC in Dubai.
disc: no personal interest or association with these guys, just shouting out ppl doing cool stuff
disc: no personal interest or association with these guys, just shouting out ppl doing cool stuff
The product offerings from Ableace Raakin include funding transactions and consumer deposits, allowing Islamic finance institutions access to similar credit and depositary facilities common among non-Islamic banks:
It is also worth noting that while the use of interest rate benchmarks such as LIBOR in pricing murabaha deferred sales is has been occasionally questioned, it is usually viewed as permissible among institutional players, linking these markets to the rest of the global system:
The expansion of the physical and technical infrastructure that underpins these systems is both interesting and exciting, and the participation of EM central banks (eg. Bank Negara Malaysia helped Ablease develop the ARIIMS Trading System) gives them influence and credibility:
That's it for now! There is a lot of cool stuff going on in this and adjacent areas (eg. Islamic trade finance is another fun rabbit hole) so maybe more coming later!
For now, hope everyone is ending 2020 on the best note possible and enjoyed the thread! Cheers!
For now, hope everyone is ending 2020 on the best note possible and enjoyed the thread! Cheers!
