“This is a real innovation in what could potentially be a huge growth area,” ISDA chairman Eraj Shirvani said in an interview in Singapore on Monday.
“Establishing market standards with the input of the scholars’ opinions, combined with the expertise and benefits of the ISDA framework, potentially opens up a significant array of new hedging possibilities for issuers and investors.”

The New York-based ISDA, which represents more than 830 organisations active in the US$592 trillion (RM2,012.8 trillion) derivatives market, started working on its syariah-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006.

The first version of their framework will focus on swaps for profit-rate and currency transactions, Shirvani said.

Islamic finance is the fastest-growing section of the global financial system with US$919 billion of assets under management, including US$114 billion of syariah-compliant bonds, known as sukuk, Prudential Financial Inc said on Oct 7.

From being almost non-existent a decade ago, the Islamic bond market has grown to US$130 billion, according to Moody’s.

Sukuk have returned 27% this year, an HSBC Holdings Plc index shows, after the market fell four-times as much as conventional investment-grade corporate debt last year.

The Dubai government set up a US$2.5 billion Islamic bond programme on Oct 25 as the emirate seeks to sell international bonds for the first time in more than a year.

Malaysia, which has 14 Islamic banks and the biggest sukuk market, said in July that it would introduce a trading platform to make it easier for companies to buy and sell commodities like palm oil and rice that are used to back Islamic securities. Sukuk are asset-based bonds that pay a profit rate to investors instead of interest. — Bloomberg

This article appeared in The Edge Financial Daily, October 28, 2009.