Related News

Olam bags US$625mn shariah-compliant facility

Supply chain finance industry hopeful EU will soften late payment rules

Kairos Risk snaps up credit and surety veteran Lim

Miga sticks by €349mn guarantee for African trade finance

Bank results show muted trade finance market

FCI, the global representative of the factoring and receivables finance industry, has amended its ruleset to support sharia-compliant factoring.

It has done so to “ensure that this important and growing branch of factoring is facilitated within the FCI member network”, the body says in a statement. The update, it adds, will “allow support for this type of business on a fully cross-border international basis”.

FCI has made the changes to its ‘General Rules of International Factoring’, a set of rules used by many financial institutions, after receiving unanimous support in a vote by its members at its 50th anniversary annual meeting in Amsterdam last week.

The amendments were prepared by a working group created by FCI’s legal committee together with Noor Bank and the International Islamic Trade Finance Corporation (ITFC), at the suggestion of Dar Al Tawreeq, a provider of sharia-compliant working capital programmes in the Mena region and a member of FCI.

The inclusion of Islamic factoring in FCI’s general rules effectively means there is now a standard framework that Islamic banks and factoring companies can refer to for such transactions, something that could further boost the growth of Islamic financing: in a recent report, Moody’s predicted that Islamic financing assets will grow at 7% this year, outpacing conventional counterparts.

Speaking to GTR for its upcoming Q3 issue, bankers pointed to trade finance specifically as an area with huge potential for growth as an Islamic offering, saying they generally see a rise in the amount of new companies now tapping into Islamic trade finance products as a new means of funding.

“A lot of conventional customers have started shifting to Islamic finance due to institutional requirements for adherence to sharia principles,” said Krishnakumar Duraiswamy, head of trade finance at Abu Dhabi Commercial Bank.

Ahsan Ali, global head of Islamic origination at Standard Chartered, added: “There are many corporates and government-linked companies, especially in the GCC and Southeast Asia, which are looking to progressively shift their banking facilities to sharia-compliant formats driven by promoter or sponsor preference – as long as product availability and service levels are on par with what they enjoy in the conventional space.”

However, a recent note by Fitch Ratings has labelled the lack of standardisation as one of the greatest obstacles standing in the way of the growth of Islamic finance. Currently, different jurisdictions interpret sharia differently and there is variation in how Islamic finance products are structured.

Some action is already being taken in the trade finance sector to address this particular challenge. In February, for example, the Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) announced they were working together to create a master risk participation agreement for Islamic trade finance.

The new FCI rules are undoubtedly another important step on the way to further standardisation. Noor Bank has previously said it believes a such framework would encourage other Islamic banks to apply for membership of the FCI. Noor Bank itself became the first Islamic bank to obtain associate membership of FCI in March.

Peter Mulroy, secretary general of FCI, says of the news: “Islamic Factoring is an increasingly important element in the finance of international trade and our ability to support sharia-compliant business is particularly important for our global member base.”