FCI, the global body representing factoring and receivables finance companies, is creating a new Islamic factoring chapter within its network.
The aim is to “increase financing opportunities for SMEs via Islamic factoring”, FCI says.
The association has signed an agreement with the International Islamic Trade Finance Corporation (ITFC) – a member of the Islamic Development Bank group – to work together on the new chapter, which ITFC will chair.
It comes after FCI amended its ruleset to cover sharia-compliant factoring last year, which will “allow support for this type of business on a fully cross-border international basis”, FCI said at the time.
The amendments were prepared by ITFC together with Noor Bank and Tawreeq Holding, a provider of sharia-compliant working capital programmes in the Mena region.
The new chapter will now promote the growth of SME financing under these rules, and work to improve regulatory reforms to conduct Islamic factoring in a safe and secure manner.
It will also create awareness of the product, introducing factoring to Islamic banks and non-bank financial institutions in member countries of the Organisation of Islamic Co-operation (OIC), and helping them to pursue factoring as a line of business.
“The Islamic factoring chapter is an attempt to create focus and develop a centre of excellence with best practices for the Islamic factoring sector,” says Peter Mulroy, FCI’s secretary general. “The idea is to bring a time-tested practice of traditional factoring, an open account trade finance solution to Islamic finance, so they too have solutions to provide their clients, all in a sharia-compliant manner.”
Put simply, Islamic finance complies with sharia – Islamic law – which prohibits earning interest on loans and is based on the principles of risk and profit sharing. As such, it requires special structuring for Islamic banks and non-bank lenders to be able to provide trade finance.
While demand for Islamic trade finance is growing, lack of standardisation has been labelled by Fitch Rating as one of the greatest obstacles standing in the way of its growth. Currently, different jurisdictions interpret sharia differently and there is variation in how Islamic finance products are structured. FCI’s new Islamic rules and chapter is undoubtedly an important step on the way to achieving such standardisation in the receivables finance space.
Other efforts to standardise Islamic trade finance are well underway. In January, the Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) released an Islamic master participation agreement – a global industry standard document for buying and selling Islamic trade-related risk.
It followed the announcement in October by trade finance marketplace LiquidX that it had opened its platform to sharia-compliant transactions, having developed a structure together with the Bank of London and the Middle East (BLME), a UK-based Islamic bank.
Speaking to GTR at the time, Zane Baring, director at LiquidX in London, said Islamic finance offers a new way for corporates to source liquidity they couldn’t previously access. “There is so much liquidity in Islamic finance, and there aren’t enough products out there for them to invest in,” she said.