Islamic finance product of the year: CIMB Islamic for Islamic profit rate swap
CIMB Islamic’s Islamic profit rate swap (IPRS), a shariah-compliant version of an interest rate swap, opens up a new field in Islamic finance. According to Badlisyah Abdul Ghani, the bank’s head, the IPRS was launched in December 2005 under the purview of Malaysia’s central bank.
A conventional interest rate swap serves to protect financial institutions from fluctuations in borrowing rates and provide a risk control mechanism. CIMB’s IPRS carries the same characteristics as a conventional IRS, but is not derived from the trading or exchange of interest rates but rather from the trading of real assets. It aims to match funding rates with return (from investment) rates; lower the cost of funding; restructuring existing debt profile without raising new finance or altering the structure of the balance sheet; and enhance credit risk management through the reduction of credit risk exposure.
The trading of an asset under the IPRS is based on a bai inah contract between a financial institution and swap counterparty, using any tangible asset acceptable under shariah law. According to CIMB, the flexibility of the structure means that it can also use the shariah principle of tawarukh to effect the trading of an asset.