Monday 20, March 2017 by Georgina Enzer

DFM adds hedging standards to Islamic finance compliance regulations

The Dubai Financial Market (DFM) has published the final version of “Standard on Hedging against Investment and Finance Risks”.

This standard is the first comprehensive standard of its kind in the Market. This standard is the latest addition to DFM’s Shari'ah-compliant standards, which include Standard on Stocks and Standard on Sukuk issued in 2007 and 2014 respectively, according to the DFM.

“Building upon what has been achieved in the past, the official launch of the Hedging Standard, combined with the previously issued Stocks and Sukuk Standards, will strengthen the framework environment for the Islamic finance sector. It will further boost Dubai’s impressive successes as the capital of Islamic economy globally in line with the wise vision of His Highness Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President, Prime Minister and Ruler of Dubai. Moreover, this significant step underlines DFM’s effective role in providing Shari'ah-compliant standards considering its status as the first Shari'ah-compliant exchange globally since 2007. DFM’s Standard on Hedging will provide an important reference for Islamic banks and financial institutions as we believe that such standards will further stimulate the rapidly growing Islamic finance industry,” said His Excellency Essa Kazim, Chairman of DFM.

The key amendments and add-ons to the draft of the standard are adding two types of risks; these are property risk, which must be borne by the owner so that he becomes liable for the damage or loss of his property; and reputational risk, which relates to Shari'ah incompliance.

The amendments state that when remaining unpaid instalments become due as a consequence of a failure in debt repayments, the nature of the finance originally given has to be taken into consideration, for the creditor is not allowed to receive more than the amount of debt owed.

The amendment also looks at the admissibility of the penalty clause only in Istisnah, supply contracts and labour-lease contracts, excluding the contracts that result in a monetary debt owed by the debtor. The changes further validate the letter of guarantee and the documentary credit and are designed to address the risk of non-payment.

The additions emphasise the admissibility of the third-party guarantee in contracts of partnerships, Mudharaba and agency in investment, provided no link is made between this guarantee and the contract of partnership or Mudharaba.

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