The Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) are to jointly create an industry standard document to be used for buying and selling Islamic trade-related risk.

The two parties have announced they have entered a memorandum of understanding to create a so-called master risk participation agreement to support Islamic trade finance.

The industry already has such a master risk participation agreement to facilitate distribution of regular trade risk. Introduced by Baft 10 years ago, the framework has become the industry benchmark for such trade finance transactions.

The advantage of a master agreement is that it reduces the need to carry out much of the expensive and onerous groundwork in ensuring an agreement meets capital rules requirements and other regulatory compliance.

According to Baft, the standard has been critical in supporting global trade growth, enabling banks with strong distribution networks to generate additional financing for clients while still effectively managing their balance sheet capacity.

Now the association, together with IIFM, aims to repeat the success in the Islamic trade finance space, where standardisation is “much needed”, according to Tod Burwell, president and CEO of Baft.

The Islamic risk participation agreement will incorporate the practical considerations for funded and unfunded risk participations in trade assets within a sharia-compliant framework.

IIFM is a standard-setting body in the Islamic financial services industry, focusing on developing standardised financial contracts and product templates relating to trade finance, among others.

Islamic finance is an area that is growing much faster than conventional financial services. In a statement, Ijlal Alvi, CEO of IIFM, notes that while the share of sharia-compliant transactions is still “relatively small”, trade finance presents “huge potential for Islamic finance”.

Khalid Hamad, chairman of IIFM, adds that the partnership forms another step towards the body’s aim to create “unified and transparent market practices” and that it “contributes to the sustainable growth of the industry”.

He says: “Earlier co-operation with certain other international organisations and now Baft will no doubt contribute in increasing the trade finance business on a sharia-compliant basis.”