Dubai Financial Market (DFM) today officially published the final version of its “Standard on Hedging against Investment and Finance Risks”, the first comprehensive standard of its kind, as part of the DFM’s constant efforts to further enhance the guiding framework of Islamic finance and capital markets. This standard is the newest addition to DFM’s Shari’a-compliant standards, which include Standard on Stocks and Standard on Sukuk issued in 2007 and 2014 respectively.
The draft of the “Standard on Hedging against Investment and Finance Risks” was posted on DFM’s website, www.dfm.ae, in October 2016, in order to obtain Islamic finance professionals’ feedback prior to the official launch.
His Excellency Essa Kazim, Chairman of DFM, said, “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’a-compliant standards considering its status as the first Shari’a-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.”
“As the first of its kind standard on hedging of investment and Islamic finance activities, this standard is the outcome of DFM’s Fatwa and Shari’a Supervisory Board’s extensive effort. We have examined various aspects of hedging and related standards as well as Fatwas issued by reputable entities on the hedging concept,” Dr. Hussein Hamed Hassan, Chairman of Fatwa and Shari’a Supervisory Board, DFM said. “The Standard has attracted many Islamic finance and Shari’a scholars during the consultation period and they have provided us with numerous productive suggestions that played a pivotal role in launching a comprehensive standard that covers all types of Islamic finance and investments. It also defines all types of risks according to their relevance and nature as well as sets parameters for the valid hedging instruments,” he added.
The key amendments and add-ons to the draft of the standard are:
Adding two types of risks, which are among the most significant risks in Islamic finance and investment. These are the property risk, which must be borne by the owner so that he becomes liable for the damage or loss of his property, and the reputational risk, which relates to Shari’a incompliance.
Emphasizing that when the remaining unpaid installments become due as a consequence of some 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.
Emphasizing the admissibility of the penalty clause only in Istisna, supply contracts and labor-lease contracts, excluding the contracts that result in a monetary debt owed by the debtor.
Emphasizing that the letter of guarantee and the documentary credit are meant to address the risk of non-payment.
Emphasizing the admissibility of the third-party guarantee in contracts of partnerships, Mudaraba and agency in investment, provided no link is made between this guarantee and the contract of partnership or Mudaraba.