CBB launches new Islamic liquidity management tool

MANAMA: A Sharia-compliant alternative to foreign exchange forwards has been launched by Central Bank of Bahrain (CBB) as a liquidity management tool for Islamic retail banks.

The regulator said the launch of the facility is part of ongoing efforts towards the development of Islamic banking and promoting liquidity managment.

The tool is based on the ‘Single binding Wa’ad-based structure’ agreement that has been developed by the International Islamic Financial Market (IIFM) and International Swaps and Derivatives Association (ISDA).

It is considered the latest effort by the industry body to improve the available hedging practices in the Islamic banking sector.

The CBB emphasised that providing such Sharia-compliant products contributes to the diversification of Islamic investment opportunities and enhances the kingdom’s position as a financial centre for Islamic banking.

According to Investopedia, a currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date.

It is essentially a customisable hedging tool that does not involve an upfront margin payment.

The other major benefit of a currency forward is that its terms are not standardised and can be tailored to a particular amount and for any maturity or delivery period, unlike exchange-traded currency futures.

Source: http://www.gdnonline.com/Details/691687